Re:You May Be Better Off Picking Stocks at Random, Study Finds
by username90 on Sunday August 18, 2019 @12:20AM
(#20728215)
Concrete example why it doesn't necessarily work:
Lets say you always have two companies, A and B. Each year one of them triples in value, the other loses all its value, but the loser gets recreated so you can invest in it again. Each year you get to distribute your funds.
Your original strategy is to invest everything in A every year. But after doing some simulations, you see that your current strategy makes you lose all your money within a few years since A will sooner or later make you lose all your money. Should you invert your current portfolio and only buy B? Of course not, both stocks are equivalent in isolation!
The best strategy is to allocate your funds 50/50, that way you double every year. Allocating each part of your money randomly would get close to this, so is still way better than just picking one or the other. What is important is to find stocks whose risks doesn't correlate with each other, since correlated risks will cost you a huge amount in times of down-turns.
Lets say you always have two companies, A and B. Each year one of them triples in value, the other loses all its value, but the loser gets recreated so you can invest in it again. Each year you get to distribute your funds.
Your original strategy is to invest everything in A every year. But after doing some simulations, you see that your current strategy makes you lose all your money within a few years since A will sooner or later make you lose all your money. Should you invert your current portfolio and only buy B? Of course not, both stocks are equivalent in isolation!
The best strategy is to allocate your funds 50/50, that way you double every year. Allocating each part of your money randomly would get close to this, so is still way better than just picking one or the other. What is important is to find stocks whose risks doesn't correlate with each other, since correlated risks will cost you a huge amount in times of down-turns.