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White paper — Math Matters: Rethinking Investment Returns & How Math Impacts Results

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Swan Research — Innovative Thought Leadership

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. 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.

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

Swan believes it is impor­tant that investors have a bet­ter under­stand­ing of how dif­fer­ent equi­ty invest­ments ebb and flow and grow over time in order to prop­er­ly assess them. Sec­ond, many investors famil­iar with pas­sive or active equi­ty invest­ments some­times have cer­tain mis­per­cep­tions regard­ing the Defined Risk Strat­e­gy or oth­er hedged equi­ty strate­gies. This is main­ly because a hedged equi­ty approach gen­er­al­ly under­per­forms dur­ing bull mar­kets and tends to out­per­form in bear mar­kets.

The DRS, with its unique approach, requires a full mar­ket cycle and is bet­ter posi­tioned as a core, long term hold­ing and not a short-term trad­ing vehi­cle.