mph_Ragnarok wrote:But why would you think that's a good indication of the future at all? The economy and the world is WAY different than it has been, and it's not just "bigger" it's different.
I'm not depending on the appearance of the economy being the same, on things like the continued importance of fossil fuels. I'm depending on the fact that companies will still produce value from capital, both here and abroad, and that it will still be profitable to provide capital to the means of production, as it always has. As long as those assumptions stay true, there's no reason to think things will change much, even if the small picture is radically different.
Also, the volatility of stocks does not mean you earn a higher rate of return with high probability in the long run with volatility in the short run
Yes, yes it does. That's exactly what that means. Why would investors purchase more volatile assets if they were not compensated by more reward?
Answer: they wouldn't. They don't.
What I mean is that stocks have higher expected return in the long run than bonds of course, but expected return is just a mean, it says nothing about the volatility of long term returns, which is also high of course.
Because of reversion to the mean, an exceptional 10-year return is much closer to the mean 10-year return than an exceptional 1-year return. While a 99th
percentile 1-year return might be way, way far away from a typical 1-year return, a 99th
percentile 10-year return will be much closer: it may vary from the mean by an annualized two or three percentage points, instead of thirty or forty. And I'm not talking about ten years, but sixty. There's a lot of time ripe for reversion there.