http://www.subramoney.com/2013/05/equity-markets-give-good-average-returns/
If one leg of yours is in the oven, and the other in a freezer, on an average you are comfortable. This is a big learning in statistics – the word average makes no sense if the standard deviation is very high. In cricketing language if you see Shahid Afridi and Rahul Dravid, – the 2 of them have an average of 22 and 58 respectively. However, Shahid Afridi has a high standard deviation and Rahul has a low standard deviation.
Which means whenever Shahid Afridi goes out to bat, the probability of his getting 22 is NOT AS HIGH as Rahul Dravid getting 58.
However, you need to remember that over the past 20 years, Rahul has an average of 58 and Shahid has an average of 22. So if you believe in regression to the mean, the average will catch up.
If you use the word average remember that markets have given returns of 240% followed by a -42%. Imagine what happens to YOUR money if you entered just AT THE PEAK? next year you see YOUR portfolio down almost HALF! That is not easy. So when you see a huge deviation from the mean, either invest aggressively OR sell aggressively (hoping for regression to the mean)!!
If one leg of yours is in the oven, and the other in a freezer, on an average you are comfortable. This is a big learning in statistics – the word average makes no sense if the standard deviation is very high. In cricketing language if you see Shahid Afridi and Rahul Dravid, – the 2 of them have an average of 22 and 58 respectively. However, Shahid Afridi has a high standard deviation and Rahul has a low standard deviation.
Which means whenever Shahid Afridi goes out to bat, the probability of his getting 22 is NOT AS HIGH as Rahul Dravid getting 58.
However, you need to remember that over the past 20 years, Rahul has an average of 58 and Shahid has an average of 22. So if you believe in regression to the mean, the average will catch up.
If you use the word average remember that markets have given returns of 240% followed by a -42%. Imagine what happens to YOUR money if you entered just AT THE PEAK? next year you see YOUR portfolio down almost HALF! That is not easy. So when you see a huge deviation from the mean, either invest aggressively OR sell aggressively (hoping for regression to the mean)!!
