It’s been called the cruel math of investing, and sometimes used to justify a more conservative approach. Whenever your account loses a percentage of its value, it has to go up by a greater percentage to put you back where you started. For example, a $40,000 account would drop to $30,000 in a 25% loss; getting it back to $40,000 requires growth of 33%. If your account drops by 50% you need to grow it by 100% to recover. Yet there’s a reason this math isn’t cruel at all, and shouldn’t affect your judgment about how much risk to take with your investments. (more…)

Suppose you’re offered a choice of two investments. We can’t predict how either one will perform, but based on their characteristics the performance we would expect on average from the two investments is the same, but one carries a greater likelihood of truly superior performance. Which would you choose?

When you understand investment risk well enough to respond confidently with the correct answer to this question, you’re far ahead of the typical investor. (more…)