Today was just noise
You young guys read the bit below .... if attention span a bit low the message is
Over a very short time period, one typically observes the variability of the portfolio, and not the returns. Our emotions are incapable of distinguishing between the two, and panic or disappointment can easily set in.
Instead of finding it in Talebs book and typing it out google found it for me
http://www.financialplanningsouthafr...trategies.html
Nassim Taleb, in his book, Fooled by Randomness, imagines a fictitious retired dentist who employs long term investment strategies and expects to earn investment returns of 15% over time on his portfolio, with an error rate (or “volatility”) of 10% a year.
From a statistical point of view, if one assumes a normal distribution for simplicity, it means that out of every 100 observations of investment performance we would expect that close to 68 of them would fall within a band of plus and minus 10% around the expected return of 15% (they would fall between 5% and 25% just over two-thirds of the time).
A 15% return with a 10% volatility per year translates into a 93% probability of success (a positive return) in any given year. Taleb points out, however, that the probability of success reduces as the time scale narrows.
For example, there would be a 67% probability of success with a one-month time frame, and only a 54% probability of success if the time frame is reduced to one day. This is common sense: in the very short term anything can happen. It takes time, or an increased number of observations, for the average long-term trend to emerge.
If the retired dentist monitored his long term investment portfolio every minute in an eight-hour day, he would on average have 241 pleasurable (positive return) observations against 239 unpleasurable (negative return) observations.
There is an old adage in the financial advice industry...
...an investor experiences the pain of a loss with twice the intensity of the pleasure of a gain!
This unfortunate dentist would probably end every day emotionally drained, stressed and uncertain about his investment strategy. The chances of a poor investment decision, based largely on emotion, are high.
If the dentist examines his long term investment portfolio every month (perhaps he gets a monthly valuation statement). As 67% of his months will be positive, he incurs only four unpleasurable observations, and eight pleasurable observations.
There is still a good chance of a poor decision - remember that it is possible that he could experience a few negative months in a row. It takes a strong investor not to panic in a situation like this.
If he could extend his time scale to one year (where the portfolio’s performance is assessed in an annual review with a financial advisor, for example) then the picture changes dramatically. He will in all likelihood experience only one unpleasant year out of every 20. The chances of making a bad investment decision, based on emotion, are now very low.
It is important to note that the overall investment returns are identical in the above examples (the same set of data has been used - it is just the time frames that have been changed).
Over a very short time period, one typically observes the variability of the portfolio, and not the returns. Our emotions are incapable of distinguishing between the two, and panic or disappointment can easily set in.
Originally Posted by couta1
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