Re: Investments

From: Carl Feynman (carlf@atg.com)
Date: Thu May 22 1997 - 12:23:46 MDT


At 10:29 AM 5/22/97 -0700, Hal Finney wrote:
>The thing I keep hearing is that the stock market's performance over the
>last 10 years or so has been unusually good compared to historical
>averages.

This is true.

>The implication is that stocks would be expected to underperform
>over the next decade, either returning to their average growth rates
>or possibly even falling lower to compensate for the recent spurt.

As far as anyone can tell, the stock market averages move in a random walk.
So they don't alternate up and down decades (as you suggest) nor are they
going to keep going up because of 'momentum' (as the zillions of people
currently putting their life savings into mutual funds seem to believe).

Technically speaking, the values of the S&P500 (or any other broad market
average) move in a pattern statistically indistinguishable from a biased
Levy flight (which is a particular type of random walk more vulnerable to
massive sudden ups and downs than the usual Gaussian random walk). The bias
is, fortunately, upward. This makes stocks a good investment if you're
willing to not get your money back for fifteen or twenty years. I just
moved $30,000 from real estate into a mutual fund this morning. Assuming
nothing too drastic happens, I plan to spend that money sometime in the
second quarter of the twenty-first century.

--CarlF



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