### Magnifying the Trivial

Hussman continues to be bearish or, at the least, hes not convinced there is any compelling reason to have market risk in is holdings.

Hussman Funds - Weekly Market Comment: September 10, 2006 - Magnifying the Trivial: "Think of it this way. Suppose that there was a high 80% chance that the market will rise 10% over the coming year, and just a small 20% chance that it will decline 15% over the coming year. Sound like good odds? Well, given those odds, the expected return would be [.80(10%) + .20(-15%) = ] 5%, which is the same as you'd get in risk-free T-bills. A risk-averse investor wouldn't take the bet. "

## 2 Comments:

Yes, but one can easily propose a more detailed list of possible outcomes instead of a "80% chance of a 10% gain" such as:

20% probability of 5% gain

40% probability of 10% gain

10% probability of 15% gain

10% probability of 20% gain

that looks reasonable,and, combined with the 20% probability of 15% loss

end up with an overall "expected return" of 5.5% - which is better than T-bills or even your friendly online bank account.

Any playing with numbers that is based on someone's "guestimates" of next year's "likely returns" is a waste of time. Forget market timing based on guesses, and just stick to your long term asset allocation mix. If you start playing with dynamic asset allocation you might win - but it would be a fluke, and you're just as likely to reduce your returns as make any improvement.

Regards

http://enoughwealth.blogspot.com

Talk about magnifying the trivial! The harangue re. the Scooter pardon takes the cake. For example try, this.

Post a Comment

## Links to this post:

Create a Link

<< Home