Do investors really understand the math behind investment returns?
Many investors make their investment decisions based upon emotions like fear and greed. They do not understand the math that drives successful long-term results and why this is important. Understanding the core mathematical principles driving investment returns can help investors make better investment decisions. The paper will focus on four core, interconnected mathematical principles, all of which are instrumental to achieving better investment results over time:
1. The importance and power of compounding
2. The value of avoiding large losses
3. The importance of variance drain
4. The importance of a non-normal distribution of returns
These core principles are often overlooked, ignored, or misunderstood by investors and will be explored in this paper for the purpose of strengthening the decision-making process.
There are a lot of misconceptions amongst investors as it relates to equity investment returns, hedged equity returns, and the math behind them.
The goal of this paper is to establish that certain mathematical principles support the usage of a hedged equity approach over other traditional equity approaches for long-term investment growth.