Friday, January 10, 2014 4:42:12 AM
Found this to be interesting as well. The 50% invested providing 85% of the fully invested return made me think of this graphic on the Vanguard investors website.
This is the link/page to which I think you are referring
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk
A point of note is that those are arithmetic averages (I believe). That doesn't however impact the overall ratio though i.e. for 100% stock we might approximate the standard deviation as being the highest extreme for 100% stock i.e. 54.2% highest annual gain, less the average gain of 10% = 34.2% as being a three sigma (standard deviation) event, such that 1 standard deviation approximates to a third of that = 11.4%
Given the arithmetic average (10%) and standard deviation (11.4) we can approximate the geometric gain using Pythagorean CAGR approximation
which works out in that particular case to 9.4% annualised.
Do the same for 50-50 (max 32.3%, average 8.3%, approx std. dev of 8 - and a 8.3% arithmetic average with 8 std. dev = 8 annualised (geometric) approximation.
8% annualised from 50-50 compared to 9.4% annualised from 100% stock is also 85%.
Clive.
This is the link/page to which I think you are referring
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk
A point of note is that those are arithmetic averages (I believe). That doesn't however impact the overall ratio though i.e. for 100% stock we might approximate the standard deviation as being the highest extreme for 100% stock i.e. 54.2% highest annual gain, less the average gain of 10% = 34.2% as being a three sigma (standard deviation) event, such that 1 standard deviation approximates to a third of that = 11.4%
Given the arithmetic average (10%) and standard deviation (11.4) we can approximate the geometric gain using Pythagorean CAGR approximation
which works out in that particular case to 9.4% annualised.
Do the same for 50-50 (max 32.3%, average 8.3%, approx std. dev of 8 - and a 8.3% arithmetic average with 8 std. dev = 8 annualised (geometric) approximation.
8% annualised from 50-50 compared to 9.4% annualised from 100% stock is also 85%.
Clive.
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