[lodi]

> But from 2000-2002 there was a 3 year run of negative returns totaling -43.4% (-9.1%, -12.0%, -22.3%).

You can't add returns like that. Each year is cumulative/compounding. At the end of the three years, your investment is down to 0.909 * 0.88 * 0.777 ~= 0.6215, so you've actually lost 48%, not 43%.

Lookup arithmetic vs geometric investment returns for more info.

To really drive the point home, consider the following thought experiment: let's say you have a catastrophic -99.99% return the first year, then a solid 9.74%[1] return for each of the next 99 years. The arithmetic average return is (-0.9999 + 99*0.0974)/100, or about 8.6%, which sounds pretty good. But the geometric (i.e. actual) trajectory of your money is that you started with $1000, went down to $1, and then slowly grew back to exactly $1000! So your actual 100-year return was 0%.

[1] Use the 99th root of 10000 for the exact value needed to make this example work.

[maerF0x0]

> Each year is cumulative/compounding. At the end of the three years, your investment is down to 0.909 * 0.88 * 0.777 ~= 0.6215, so you've actually lost 48%, not 43%.

You're correct on the idea but wrong on your math.

1-.6215 = 0.3785 ... Successive positive compounding leads to compounded growth, but successive negatives lead to diminished losses (because in year 2 you're only losing 12% of 90.9% , not 12% of 100%)

[lodi]

My bad, I messed up the mental arithmetic on 1-0.62. Right, 38%.

[iamjdg]

thanks, your right, my mistake. i was just surprised that the most negative return years in a row during the entire history of the S&P 500 was only 4 years, and typically it is only 1.4 years.