The ‘Right’ Or ‘Wrong’ Decision
Unless you aren’t paying attention, recently, stocks and bonds have gone through some big gyration. S&P and all other major stock indices had fallen more than 10% at one point in October. However, stocks have staged some meaningful comeback in the past several days. As usual, this has produced tons of reports/commentaries in financial media to analyze and proclaim ‘right’ or ‘wrong’ decisions on market direction. Some of them are technical, some of them are fundamental. But one thing is for sure: they are often conflicting: some says buy and some says sell.
No one can be right all the time
The very first sense one should come to is that no one can be right all the time, especially for a short term. Let’s look at some interesting fact:
|Total Worth at the end of 2017|
|VFINX but goes to cash if that year’s return is negative||$54m|
|VFINX but short the same amount if that year’s return is negative||$114m|
|VFINX but short the same amount if the month’s return is negative||$86billion|
In the above table, we look at investing in S&P 500 through Vanguard 500 index fund VFINX for the past 30 years from 1988 to 2017. If one can predict every year’s return correctly and goes to short (i.e. bet the index will fall) in that year, he/she would accrue $114 million by the end of 2017, $94million more than one would just invest in VFINX and do nothing. The real kicker is that if this person can predict every month’s S&P 500 return correctly, he/she would accumulate a whopping $86 billion in the 30 year period. So it’s not hard to see that the compounding can quickly add up: another 30 years like this would produce $86billion x 86 billion, more than the wealth of the whole world.
Please login or register an account to view the newsletter