Motivated by comments on the Motley Fool I read this comment: For Fools with a long investing horizon, I'd recommend keeping much of your money in stocks, as opposed to bonds. According to research from business professor Jeremy Siegel, stocks outperformed bonds 74% of the time over all fiveyear periods between 1871 and 2001. Over all 10year periods in the same span, that figure rises to 82%. Meanwhile, stocks outperformed bonds 95% of the time over all 20year periods, and 99% of the time over all 30year periods!>They're recommending 100% stocks? Actually, the comment was directed at the "young or patient" investor, so ... >Yeah, so why would anybody invest in bonds.
A $1.00 investment in the bond fund would have grown to $3.40 (over the period 19902008). >Aah, but the stock fund grew to over $7.00!!
>You're talking drawdown, eh?
>So that's why people invest in bonds?
>Square root of 250? What's that for?
>Because there are 250 market days in a year?
>So where's the spreadsheet?
Type in a couple of Yahoo symbols, click a Download button then gaze in awe at the pretty charts. Here are a couple more:
We showed here that, for small returns (and daily returns are small), the compound return is: Average  0.5*Volatility^{2}. Then Average/Volatility would become (Average  0.5*Volatility^{2})/Volatility. Since we're "annualizing" everything in sight, we multiply the daily Average by 250 and the Volatility by SQRT(250) to switch to annual values. That changes our magic formulas to:
>I don't imagine there's much difference, eh?
>Did you give them different names?
