Saturday, January 17, 2015

US Equity Returns: Are You Risk Neutral or Risk Averse?

The reality is that we are human; we like the idea of profits and markets gaining to the upside and hate losses and markets losing ground. Our reaction is asymmetrical and once capital is lost do most of us have the stomach to be invested again in the hope that markets will rebound? Recent US equity market history (post 1999) is useful in this regard with losses occurring in 2000, 2001, 2002, and 2008. Any investor would have had a sense of regret after witnessing the depletion of capital. It isn't enough to hear those who state the efficacy of "time in the market", the reality is that many drivers are responsible for such returns --many beyond the realm of fundamental investing-- so a key question becomes: can you sleep at night without worrying about your investments. As the chart below shows, and as we should know, equity returns and returns of financial assets in general, are not normally distributed.
Chart Source: Marketwatch