Hey, great article, Tyler! Thanks for writing it!Tyler wrote: Depending on the numbers you look at, the return on your additional risk may not be nearly as high as you may think. Volatility is not simply an emotional drag but a financial one as well. http://portfoliocharts.com/2015/08/24/a ... trap/
Black Monday
Moderator: Global Moderator

 Executive Member
 Posts: 268
 Joined: Mon Aug 24, 2015 3:12 pm
Re: Black Monday
Re: Black Monday
From Tyler’s article:
I have seen tools that let you input regular, automatic investments. Buys at specific prices, though it gets complicated.
I wish there were a tool out there — and maybe there is — that lets you add in ongoing cash infusions. I didn’t start really investing until 2004. However, I was able to put a significant amount into stocks on really bad days in 2009. Not the absolute bottom, but really bad days.Recently, a 100% stock market investor starting in 2000 experienced 13 years of negative real returns before finally breaking even.
I have seen tools that let you input regular, automatic investments. Buys at specific prices, though it gets complicated.
VENEZUELA: U.K. Judge Rejects Maduro’s Bid for Gold
Re: Black Monday
IMHO, switching measures to the more rosy one looking forward is exactly what gets many investors in trouble and sets them up for disappointment. Years later they'll look back at their returns and say the portfolio no longer works as it was sold to them, when in reality they were using unrealistic projections to begin with.mathjak107 wrote: if you want to know about the past you want cagr returns as they account for sequence risk .
if you are projecting forward you want to use average returns since sequences are unknown .
Since 1900, the compound real return of the S&P500 trails the average real return by 22% per year (6.6% vs. 8.5%). http://www.moneychimp.com/features/market_cagr.htm Those choosing to invest in stocks based on average returns would have accumulated (on average) 41% less money than they expected 30 years later. Most investors would agree that's a big difference but are completely unaware of that fact. Invest however you please, but ignore the effect of volatility in your own future projections at your own risk.
@Jack Jones  Thanks! If you find it helpful, please spread the word.
Mechanical engineer, history buff, treasure manager... totally not Ben Gates
Re: Black Monday
That's a very important point! Thanks for the reminder.Tyler wrote:IMHO, switching measures to the more rosy one looking forward is exactly what gets many investors in trouble and sets them up for disappointment. Years later they'll look back at their returns and say the portfolio no longer works as it was sold to them, when in reality they were using unrealistic projections to begin with.mathjak107 wrote: if you want to know about the past you want cagr returns as they account for sequence risk .
if you are projecting forward you want to use average returns since sequences are unknown .
Since 1900, the compound real return of the S&P500 trails the average real return by 22% per year (6.6% vs. 8.5%). http://www.moneychimp.com/features/market_cagr.htm Those choosing to invest in stocks based on average returns would have accumulated (on average) 41% less money than they expected 30 years later. Most investors would agree that's a big difference but are completely unaware of that fact. Invest however you please, but ignore the effect of volatility in your own future projections at your own risk.
@Jack Jones  Thanks! If you find it helpful, please spread the word.
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter.
 D.L. Moody
Diversification means always having to say you're sorry.
 D.L. Moody
Diversification means always having to say you're sorry.
 mathjak107
 Executive Member
 Posts: 2762
 Joined: Fri Jun 19, 2015 2:54 am
 Location: bayside queens ny
 Contact:
Re: Black Monday
it is so important to understand i will say it again lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .
vanguard quotes average returns on their site while morningstar is cagr .
think about it , if you go 100% the first year and down 50% the second year your cagr is zero % return but that could be expressed as a 25% average return .
a sly advisor could get away saying that was a 25% average return even though you got zero
vanguard quotes average returns on their site while morningstar is cagr .
think about it , if you go 100% the first year and down 50% the second year your cagr is zero % return but that could be expressed as a 25% average return .
a sly advisor could get away saying that was a 25% average return even though you got zero
Last edited by mathjak107 on Tue Aug 25, 2015 7:35 pm, edited 1 time in total.

 Senior Member
 Posts: 117
 Joined: Mon May 11, 2015 10:24 pm
Re: Black Monday
Say it again. Louder and slower. I still don't understand what use I have for average returns.mathjak107 wrote: it is so important to understand i will say it again lol .for looking at things in the past you use cagr returns . projecting in to the future you use average since sequence risk can be big .
Re: Black Monday
Sequence is extremely important when evaluating overall returns when one is making periodic contributions.
For fun, I grabbed 34 years of S&P annual returns (19812014) from the moneychimp site Tyler mentioned. The CAGR is 11.3%. The assumption here is that you deposit everything before year 1, and withdraw at the end of year 34.
However, if instead, you start with $0, but deposit $1000 at the start of each year, the final value is $320,000, and corresponding the IRR (internal rate of return) is 10.8%. Note that this is slightly lower than the CAGR.
Keeping the $1000 per year deposit, but now sequencing the annual returns from lowest to highest, the final value is $1,702,000, which is 18% IRR.
On the other hand, if the returns are sequenced from highest to lowest, the final value is only $162,000, which is 8% IRR.
All from the same 11.3% CAGR!
For fun, I grabbed 34 years of S&P annual returns (19812014) from the moneychimp site Tyler mentioned. The CAGR is 11.3%. The assumption here is that you deposit everything before year 1, and withdraw at the end of year 34.
However, if instead, you start with $0, but deposit $1000 at the start of each year, the final value is $320,000, and corresponding the IRR (internal rate of return) is 10.8%. Note that this is slightly lower than the CAGR.
Keeping the $1000 per year deposit, but now sequencing the annual returns from lowest to highest, the final value is $1,702,000, which is 18% IRR.
On the other hand, if the returns are sequenced from highest to lowest, the final value is only $162,000, which is 8% IRR.
All from the same 11.3% CAGR!
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.
https://fs.blog/2009/12/mentalmodelgreshamslaw/
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.
https://fs.blog/2009/12/mentalmodelgreshamslaw/
Re: Black Monday
Of course, you can see the effect of sequence in an even simpler example.
Consider a 100% return followed by a 50% return. The CAGR is 0%, of course, over these 2 years.
With this sequence, if you add $1000 at the start of each of the 2 years, you'll have $2000 at the end of year 1, and $3000 at the start of year 2 (once you add the $1000), but $1500 at the end of year 2. This is equivalent to a 17.7% IRR. That is, if you deposit $1000 at the start of each year, and the return is 17.7% each year, you'll have $1500 at the end of year 2.
Now consider a 50% return followed by a 100% return. Again, the CAGR is 0%. But you'll have $500 at the end of the first year, $1500 at the start of the second year, and $3000 at the end of the second year. This is equivalent to a 30.2% IRR.
Consider a 100% return followed by a 50% return. The CAGR is 0%, of course, over these 2 years.
With this sequence, if you add $1000 at the start of each of the 2 years, you'll have $2000 at the end of year 1, and $3000 at the start of year 2 (once you add the $1000), but $1500 at the end of year 2. This is equivalent to a 17.7% IRR. That is, if you deposit $1000 at the start of each year, and the return is 17.7% each year, you'll have $1500 at the end of year 2.
Now consider a 50% return followed by a 100% return. Again, the CAGR is 0%. But you'll have $500 at the end of the first year, $1500 at the start of the second year, and $3000 at the end of the second year. This is equivalent to a 30.2% IRR.
Last edited by tennpaga on Wed Aug 26, 2015 12:09 am, edited 1 time in total.
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.
https://fs.blog/2009/12/mentalmodelgreshamslaw/
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.
https://fs.blog/2009/12/mentalmodelgreshamslaw/
Re: Black Monday
Following up, I wanted to point out that after more research this part of my previous statement is likely incorrect. Volatility drag is absolutely real, but that particular factoid is from an inappropriately simplified calculation.Tyler wrote: Those choosing to invest in stocks based on average returns would have accumulated (on average) 41% less money than they expected 30 years later.
Also, Mathjak's point about future returns and averages is not unfounded but does require a caveat. Long story short: Looking at history (where the order of returns is certain) compound returns always trail the average and are the more useful measure of performance. Projecting into the future (where order of returns is unknown), averages are helpful because they are order of returns neutral. However, volatility still matters. Volatility does not mean you will always earn less than the historic average (you could get lucky and hit a hot run), but higher volatility does lower the median endpoint, reducing your odds of an enjoyable outcome.
Ain't math fun?
Last edited by Tyler on Wed Aug 26, 2015 2:50 am, edited 1 time in total.
Mechanical engineer, history buff, treasure manager... totally not Ben Gates
 mathjak107
 Executive Member
 Posts: 2762
 Joined: Fri Jun 19, 2015 2:54 am
 Location: bayside queens ny
 Contact:
Re: Black Monday
also the less volatile the asset the less the spread . the spread between cagr and average is greater for the s&p 500 vs a balanced fund , vs bonds vs cash .
even the mix of the portfolio matters so like the pp volatile assets can be tempered down to a point the spread is reduced far more than the assets reflect .
that is why it is hard to use cagr for projecting out .
even the mix of the portfolio matters so like the pp volatile assets can be tempered down to a point the spread is reduced far more than the assets reflect .
that is why it is hard to use cagr for projecting out .
Last edited by mathjak107 on Wed Aug 26, 2015 3:54 am, edited 1 time in total.
Re: Black Monday
Tyler, as I wrote in my PM reply, I am really taken with the Hurricane calculator at portfoliocharts. Thanks for mentioning it!
The Max and Min are good enough, so forget about the wrestling Really Bad Days data.
Also....from the results of the hurricane calc, it looks like I'm going to be rich when I'm old. Huzzah!
The Max and Min are good enough, so forget about the wrestling Really Bad Days data.
Also....from the results of the hurricane calc, it looks like I'm going to be rich when I'm old. Huzzah!
VENEZUELA: U.K. Judge Rejects Maduro’s Bid for Gold
 lordmetroid
 Executive Member
 Posts: 200
 Joined: Wed Nov 26, 2014 3:53 pm
Re: Black Monday
It would be cool if the hurricane calculator could show how many paths ended up as positive and how many ended up negative relative to the starting value