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August 09, 2010

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The good thing about investing is that the rules are pretty simple. It is not hard to capture the 8% you mentioned with the equity portion of your assets. Read "The Elements of Investing" by Malkiel and Ellis. It will take a weekend.
It's harder to understand that the sequence of market returns plays a role. In the time frame you mentioned the biggest down years occurred in the last 10 years when people had the most money invested!

I'd just like to point out that the following is incorrect (or at least needs clarification):

"One lucky win has nothing to do with the probability of future success. In fact, the probability of a win decreases with each risk taken because the odds will eventually catch up to you."

A pobability of a win in an individual scenario in a series of scenarios is fixed and has no relation to whether or not you won or lost in the past or whether you will win or lose in the future. (the best analogy I can think of is playing a game several times in a row - whether you win or lose an individual game doesn't rely on whether you won or lost in the past)

If you had a whole bunch of scenarios going at once (for example, you own a whole bunch of stocks), then the overall probability of one of them 'losing' (not any specific one, just one in general) is higher, as is mentioned.

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