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There's more dimensions to an investment than average returns. Volatility adjusted returns (or Sharpe ratio) for instance, will tell you how much returns you h

There's more dimensions to an investment than average returns. Volatility adjusted returns (or Sharpe ratio) for instance, will tell you how much returns you have per unit of risk you take. This is important because getting 10% average annual returns with 10% annual volatility is worst than getting 5% returns with 1% annual volatility. You can only compare investments at equal amount of risk. An other factor to take into account is diversification. If you have an alternative investment to compare to your base, and it's average returns is lower than your base, but it is un correlated, then you actually get an increased volatility adjusted average returns by investing in both. That's just two dimensions to take into account, there are many others, but overall: - Don't compare investments based on annualized returns alone, it really doesn't make any sense. - Don't compare investments one against an other, instead look at the addivity of one on top of another.

Karellen 2y ago
> getting 10% average annual returns with 10% annual volatility is worst than getting 5% returns with 1% annual volatility. Doesn't this depend on how long you're planning on investing for, and what your criteria for selling your investments are? If you're planning on investing for at least 10 years, and you're willing to give yourself a 2-3 year window for selling your investments once they reach a threshhold you decide on ahead of time, isn't the 10%/10% investment better? (e.g. if retirement is 20 years away, you might consider putting your funds in that sort of investment for 10 years, with a view to moving them to something less volatile in the 5 years after that, as soon as they cross a 10% annualised return threshhold during that window.)
- Galanwe 2y ago
  > isn't the 10%/10% investment better? If you consider that "you don't know any better" and returns are normally distributed (i.e. you don't have some secret sauce nobody else knows about), then there is no dimension in which the 10/10 is better. You can convince yourself intuitively by imagining how you would maximize each strategy. The amount of money you have is a factor of the risk you take, because if you want to do something risky you will not be able to borrow much, whereas if you want to do something safe you can easily borrow. That is, you objective is to maximize your expected return, under the constraint of not breaking your risk limit. Suppose you have a 10% annualized volatility risk tolerance. That's your budget. If you invest it all in a 10% average return / 10% annual vol strategy, that's it. Now if I propose you a 5% average return / 1% volatility strategy, you just have to go to the bank and borrow 10x your capital. You will have the same risk exposure (in dollar), but 5x the expected returns.
  - amanaplanacanal 2y ago
    Until a black swan event bankrupts you because of the leverage you have taken on.
  - hamilyon2 2y ago
    Is 10x borrowing even an option if we are talking retirement savings? I don't know much about finance. I guess that at that point (you borrowed 10 times your net worth). This is no longer your investment, it's your lender's investment. They will adjust interest rate to match the riskiness of whatever you are doing, leaving you with net zero. Borrowing money is not free.
    - Galanwe 2y ago
      > Is 10x borrowing even an option if we are talking retirement savings? Of course it is, though not exactly by "borrowing money" in a "mortgage" sense. Margin trading is a way to take leverage, derivatives is another. The former is simpler but costly, the latter is cheaper and allows you much more than 10x leverage, though it requires some high school mathematical thinking.
      - deleted 2y ago
        [deleted]
  - alright2565 2y ago
    What you're saying sounds right. But in practice, no one is going to lend me, a nobody, 5x my money. At least outside real estate, that's it's own crazy alternate reality.
    - Galanwe 2y ago
      5x leverage is nothing, most retail brokers will offer you much better future initial margins.
  - Karellen 2y ago
    > you just have to go to the bank and borrow 10x your capital. "just" is doing a lot of heavy lifting in that sentence.
- deleted 2y ago
  [deleted]
lotsofpulp 2y ago
> - Don't compare investments based on annualized returns alone, it really doesn't make any sense. >- Don't compare investments one against an other, instead look at the addivity of one on top of another. I don’t think either of these matter to 90% of investors whose goal is to build up a nest egg for retirement which means not spending for decades in the future. Sharpe ratios and all those “risk” adjusted calculations all involve assumptions that may or may not be true. Comparisons of just annualized returns over long periods of time seems fine for broad market index funds, especially if you are assuming the federal US government will provide a backstop.
- Galanwe 2y ago
  > Sharpe ratios and all those “risk” adjusted calculations all involve assumptions that may or may not be true. On the contrary, these risk adjusted measures assume nothing more than a normally distributed random variable. If you just look at annualized returns, then go ahead and invest in CDOs ETFs. More seriously, the S&P for instance has around 20% annualized vol, which IMHO is way above what you would want for a retirement fund. I would target something closer to 10%. > Comparisons of just annualized returns over long periods of time seems fine for broad market index funds Do you have any sort of reasoning or is it just a gut feeling?
  - g15jv2dp 2y ago
    > On the contrary, these risk adjusted measures assume nothing more than a normally distributed random variable. The financial sector isn't yet so unrelated to reality that the price of securities is random.
    - Galanwe 2y ago
      I think when stating your opinion against 40 years of econometrical research, including multiple Nobel prizes in economy, you should feel enticed to explain your opinion a bit more than "no I don't think so"...
      - 2y ago
YZF 2y ago
Interesting related concept: https://en.wikipedia.org/wiki/Efficient_frontier https://en.wikipedia.org/wiki/Efficient_frontier

Karellen 2y ago

> getting 10% average annual returns with 10% annual volatility is worst than getting 5% returns with 1% annual volatility. Doesn't this depend on how long you're planning on investing for, and what your criteria for selling your investments are? If you're planning on investing for at least 10 years, and you're willing to give yourself a 2-3 year window for selling your investments once they reach a threshhold you decide on ahead of time, isn't the 10%/10% investment better? (e.g. if retirement is 20 years away, you might consider putting your funds in that sort of investment for 10 years, with a view to moving them to something less volatile in the 5 years after that, as soon as they cross a 10% annualised return threshhold during that window.)

Galanwe 2y ago
> isn't the 10%/10% investment better? If you consider that "you don't know any better" and returns are normally distributed (i.e. you don't have some secret sauce nobody else knows about), then there is no dimension in which the 10/10 is better. You can convince yourself intuitively by imagining how you would maximize each strategy. The amount of money you have is a factor of the risk you take, because if you want to do something risky you will not be able to borrow much, whereas if you want to do something safe you can easily borrow. That is, you objective is to maximize your expected return, under the constraint of not breaking your risk limit. Suppose you have a 10% annualized volatility risk tolerance. That's your budget. If you invest it all in a 10% average return / 10% annual vol strategy, that's it. Now if I propose you a 5% average return / 1% volatility strategy, you just have to go to the bank and borrow 10x your capital. You will have the same risk exposure (in dollar), but 5x the expected returns.
- amanaplanacanal 2y ago
  Until a black swan event bankrupts you because of the leverage you have taken on.
- hamilyon2 2y ago
  Is 10x borrowing even an option if we are talking retirement savings? I don't know much about finance. I guess that at that point (you borrowed 10 times your net worth). This is no longer your investment, it's your lender's investment. They will adjust interest rate to match the riskiness of whatever you are doing, leaving you with net zero. Borrowing money is not free.
  - Galanwe 2y ago
    > Is 10x borrowing even an option if we are talking retirement savings? Of course it is, though not exactly by "borrowing money" in a "mortgage" sense. Margin trading is a way to take leverage, derivatives is another. The former is simpler but costly, the latter is cheaper and allows you much more than 10x leverage, though it requires some high school mathematical thinking.
    - deleted 2y ago
      [deleted]
- alright2565 2y ago
  What you're saying sounds right. But in practice, no one is going to lend me, a nobody, 5x my money. At least outside real estate, that's it's own crazy alternate reality.
  - Galanwe 2y ago
    5x leverage is nothing, most retail brokers will offer you much better future initial margins.
- Karellen 2y ago
  > you just have to go to the bank and borrow 10x your capital. "just" is doing a lot of heavy lifting in that sentence.
deleted 2y ago
[deleted]

lotsofpulp 2y ago

> - Don't compare investments based on annualized returns alone, it really doesn't make any sense. >- Don't compare investments one against an other, instead look at the addivity of one on top of another. I don’t think either of these matter to 90% of investors whose goal is to build up a nest egg for retirement which means not spending for decades in the future. Sharpe ratios and all those “risk” adjusted calculations all involve assumptions that may or may not be true. Comparisons of just annualized returns over long periods of time seems fine for broad market index funds, especially if you are assuming the federal US government will provide a backstop.

Galanwe 2y ago
> Sharpe ratios and all those “risk” adjusted calculations all involve assumptions that may or may not be true. On the contrary, these risk adjusted measures assume nothing more than a normally distributed random variable. If you just look at annualized returns, then go ahead and invest in CDOs ETFs. More seriously, the S&P for instance has around 20% annualized vol, which IMHO is way above what you would want for a retirement fund. I would target something closer to 10%. > Comparisons of just annualized returns over long periods of time seems fine for broad market index funds Do you have any sort of reasoning or is it just a gut feeling?
- g15jv2dp 2y ago
  > On the contrary, these risk adjusted measures assume nothing more than a normally distributed random variable. The financial sector isn't yet so unrelated to reality that the price of securities is random.
  - Galanwe 2y ago
    I think when stating your opinion against 40 years of econometrical research, including multiple Nobel prizes in economy, you should feel enticed to explain your opinion a bit more than "no I don't think so"...
    - 2y ago

YZF 2y ago

Interesting related concept: https://en.wikipedia.org/wiki/Efficient_frontier https://en.wikipedia.org/wiki/Efficient_frontier