We should stick to low-risk investments

Low risk investments are boring, slow to watch and will never get you rich. True story. But low-risk investments could be just the magic bullet that many of us need.

With $100,000 (that's alot money for most of us), guess how long you take to make you a millionaire? 25 freaking year! And that is assuming a 10% return every single year, something that is very impressive even for top fund manager.

Now, what happens if you start to lose money?


"First of all, imagine I have $100 and I invest in Fund A that returns an average of 5% a year. After three years I might have as much as $115.76. That's just $100 * (1.05)^3. But I might have less. Why? Compounding. Imagine Fund B, which also returns an average of 5% a year. But Fund B takes a wild ride – up 5% in its first year, then up 40%, then down 30%. That's still an average of 5% a year. But at the end of the three years my $100 in Fund B is worth only $102.90. That's a simple effect called “variance drain” (Messmore, Tom, “ Variance Drain,” Journal of Portfolio Management, Summer, 1995). Basically the rate that your money compounds and grows over time is equal to the average return (that 5% in our example) minus half the variance (or variability) in the returns. That variability in returns really impacts your ability to grow wealth over time."

Read http://www.stokflok.com/content/why-does-low-risk-strategy-outperform for full article.

In simple words, compounding makes you richer. The more losses you make, the harder it is for you to retire comfortably.

What do you think about this?

You are supposed to save $ monthly on top of your $100k intital capital. To reach $1m faster.

Variance drain sounds so chimp. Basically it is that upside and downside returns are asymmetric

A stock lost 50% and gain 50% does not go back to par. That's why absolute return strategy makes sense

(06-01-2014, 07:11 PM)specuvestor Wrote: Variance drain sounds so chimp. Basically it is that upside and downside returns are asymmetric

A stock lost 50% and gain 50% does not go back to par. That's why absolute return strategy makes sense

what is absolute return strategy?

Fund B is supposed to return around 5% over long term... yet didn't sell when lucky enough to get 47% over juz two years??? Sell lor, we r not fund manager lah, no need to answer to anyone...

(06-01-2014, 07:27 PM)wahkao Wrote:

(06-01-2014, 07:11 PM)specuvestor Wrote: Variance drain sounds so chimp. Basically it is that upside and downside returns are asymmetric

A stock lost 50% and gain 50% does not go back to par. That's why absolute return strategy makes sense

what is absolute return strategy?

Absolute returns is the real thing to me. Whether it take 3 months or 3 years, or in percentage or ratio terms. i am that simple.

What it means by variance drain is just a quantitative term of what it means to lose money by taking on high risk.

We love to trade. I am guilty of that too. Making a 100% return in 1 week just sounds so great and it feels even better if you manage to pull it off.

But making a 100% return could easily mean taking on a risk of >50%. In long term, even if you make a 1:1 win/loss trade, you will still not make as much profit as someone who steadily makes a mere 3% per year.

Hence, what the writer really means is that we should just stick to long term trades and let compounding effect take place. It hardly takes into account of stock picking.

(06-01-2014, 09:41 PM)arriyana Wrote: What it means by variance drain is just a quantitative term of what it means to lose money by taking on high risk.

We love to trade. I am guilty of that too. Making a 100% return in 1 week just sounds so great and it feels even better if you manage to pull it off.

But making a 100% return could easily mean taking on a risk of >50%. In long term, even if you make a 1:1 win/loss trade, you will still not make as much profit as someone who steadily makes a mere 3% per year.

Hence, what the writer really means is that we should just stick to long term trades and let compounding effect take place. It hardly takes into account of stock picking.

Ha! Ha!
i can't agree more. i am that simple absolute returns is what counts to me no matter how or what you are doing or saying.

is property considered a low risk investment

(06-01-2014, 07:27 PM)wahkao Wrote: what is absolute return strategy?

Answer:
http://www.investopedia.com/terms/a/absolutereturn.asp

In other words, absolute return in finance jargon = return in simple english.

What then is not absolute return? That will include return measurements against a given benchmark or return volatility:
eg. Relative returns (+/- against benchmark)
eg. Risk adjusted returns (eg. statistical alpha, beta, sharpe ratio)