Half the time, we end up with more than +25 % return – the median return is around 6 % per year.33 The stock market is often quoted as returning 8 % per year, but this is a mistaken calculation for several reasons: it is computed pre-cost, without adjusting for inflation, and it’s taking the arithmetic mean, which is not indicative of what one actually gets with compounding. Then again, around 7 % of the time, we end up with more than a -25 % drawdown. A -25 % drawdown shouldn’t be catastrophic to our life plans, but it comes with a hidden cost due to how money compounds: a -25 % drawdown needs a +33 % gain to recover.

How much an investment wobbles on its way up is known as its volatility. Finance people like to compare how much an investment goes up to its volatility, and this is known as risk-adjusted return. A common measure of risk-adjusted return is the Sharpe ratio, which is the median yearly return divided by the standard deviation of yearly return.

FROM:

a@xkqr.org (kqr)

Do Stonks Go Up?

Source

always err on the side of overestimating volatility - it has an outsized impact.