Math Matters Principle 4
A tail event is an extreme market event, like a bear market or bull market.
Investor often want to participate in right tail events (bull markets) for growth but want to avoid left tail events (bear markets) to avoid large losses.
“Tails” refer to the end sections of a distribution curve, demonstrated below. The distribution curve shows all possible market returns, from highest to lowest, and the likelihood of their occurrence. Lower probability occurrences are on the “tails” on the left or right of the bell-shaped curve distribution curve.
How Missing Out Benefits Investors
Avoiding large losses and reducing volatility can lead to better compound growth, but so does missing out on extreme bull markets.
Many strategies attempt to minimize the left tail risk (investment losses) without impeding the right tail return potential (investment gains). Most investors are happy removing the risk but not the gains.
However, the math behind investment returns shows that strategies that cut both tails, both extreme highs and lows, and focus on achieving consistent, more probable returns in the middle of the bell-shape curve do better off in the long-term.
Slow and Steady Wins the Race
This may seem counterintuitive at first, but chasing gains because you don’t want to miss out on substantial gains can be risky and threaten long-term financial plans. It’s like the story of the Tortoise and the Hare: Chasing gains can get you far quickly, but just one mistake can cause you to fall behind...far behind.
You can be just as successful taking it slow and steady. That’s what the math proves anyway.