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Musings
Is the market random? The book A Random Walk Down Wallstreet, as well as stories about chimpanzees or college students throwing darts and picking stocks to make a portfolio that outperformed the market make it seem that way. The random theory says that anything that affects stock prices is taken care of so quickly, you can never beat the market. So you just invest in lots of stocks, bonds, and other investments, and it should all average out to the same as the Dow Jones Average, as long as you avoid the real losers. (The dart board method, but refined by "index" funds, which do this for you.) So why do so many people lose so much in the market?
In the first place, most people are ruled by emotions, not by randomizing choices. They buy when a stock is high and sell when it's low. To work the random market, you have to choose the correct investment (not by tips), and buy and hold.
In the second place, it's not totally random. It is actually chaotic: a chaotic pattern has some aspects of randomness and some patterns that reappear every now and then. However, in a chaotic system, every time you start at the same place, something new happens. This is why "past performance does not guarantee future results," a phrase you will see in one form or another throughout the investing world.
If you invest and immediately have a loss, it has a much more profound effect than if you stay even or even gain at first, and then lose money later on. Also, if you have a major loss just before you retire, like the one that occurred with our recent bear market downturn, your plans may need to be put on hold for awhile. You can't predict the future, but you can get an idea of what can happen to your investments by using Monte Carlo analysis. This is a method that calculates what may happen to your holdings by changing the years of gains and losses, showing the best case and worst case scenarios. This can help you decide whether or not you need to beef up your investments, or plan on a later, rather than earlier, retirement.
We use Monte Carlo analysis to help you decide what will be best for your future.
We make sick money well.
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