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The Laws Of Quantitative Investing | Michael Robbins
Forward Guidance
The Variance Drag and the Assumptions of Bell Curve Returns in Investing
The variance drag concept states that if you lose 10% of your portfolio, you need to make over 11% to regain it. However, this assumes a bell curve distribution where positive and negative returns are equally likely. In reality, returns have long tails that can deplete your risk capital. While the stock market generally trends upwards, it's not a guarantee for long-term assumptions. In Japan, there was a lost decade with sideways or negative movement, which can significantly impact retirement plans. Assumptions about returns depend on individual circumstances and the markets one invests in.
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