SCOTT WELSH TRADING BLOG

Risky Business

Risky Business

Jan. 1, 2021

Happy New Year!

Recently I got an email asking about “guaranteed” returns.

And I thought that was a great topic to start a new year.

Is there a sure thing in investing? Or, put another way, what investment doesn’t have a Risk of Ruin?

Let’s take a look.

What are the Big 3 guaranteed winners in investing, according to the experts? These are the things that will never ruin us.

One is bonds. Right? Bonds are the way to go.

Well, looking at today’s rates, the US Ten-Year Treasurys are showing a yield of 0.926. Hmm, if inflation is at 3% and the yield is under 1%, that math doesn’t look too good.

Another one is real estate. Right? Real estate is the way to go.

Anyone who was alive 2007-2010 might disagree. I know people who were underwater on their mortgage for a decade. Other people, by the thousands, lost their homes during the housing crisis. If you have a chance of being homeless, I’d say the risk of ruin is substantial.

But the big one is the stock market. Right? The stock market is the greatest creator of wealth in the history of humankind.

Not so sure about that.

Just doing a quick calculation using things that have actually happened, what if the market dropped 80% (happened), your broker/fund/trading costs are 1-2% per year (true), and the market doesn’t make a new high for 12 years (happened recently)? Eighty percent plus twenty-four percent equals what? Not a lot of money left in our accounts.

Sorry Mr. Money Mustache, Jack Bogle,  and FI/RE movement cheerleaders, but you’re barking up the wrong tree. The stock market is neither safe nor guaranteed.

So, is anything safe from ruin?

Yes.

A trading system is not only safe, it’s mathematically guaranteed.

Whoa, I can hear the screaming! Let me explain.

Let’s say I open up my new Flipping Coin Investment Strategy for you to put your life savings in.

Every time it’s heads, you win $120. Every time it’s tails, you lose $100. As you know, the chances of a winning trade with this system is 50%. Every flip is a 50/50 proposition.

What are the chances you’ll lose your life savings if you risk 1% of your account on every flip? I’ll give you a second to calculate.

[waiting]

Got the answer?

It’s zero. The Risk of Ruin with this system is zero percent. 


According to the math, you could trade this forever and never lose your money.

That seems eerily close to a guarantee.

The big question is: Are there any real-life trading systems with the same possibilities as the Coin Flip System?

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.