What good is the knowledge of such things?
I think firstly, it gives you a sense of how bad market can go. If you keep working on CAGR, you'll find that the line is always linearly going upwards. Every year add x% to your previous year, without fail. But we all know that's not going to be true. The market will swing up and swing down violently and often we will be tempted to do things we otherwise might not do. You know, we always wish for a company that we're aiming at for a long time to drop a lot. But when that happens, you might have issues with survival than to talk about wealth building.
Secondly, it gives a sense of perspective. If you've been through a market swing of -50% and can still eat and laugh like nothing happened, then I know your true risk profile. No point talking about all the theory and risk management isolated from emotions. Everyone who had been in the market long enough will have to go through this acid test one day.
Will the market slip further on oil and greece? Maybe this time it's China (since when is it not China?) or perhaps EU woes? Who knows...but I do know what I'll do when that happens.
6 comments :
Good!
Every time when I read someone blogging about compounding return or CAGR of X% or XX% for X or XX years; are you sure what you are blogging? LOL!
Hi there,
Market swing up or down, the one question i am interested in is whether cash flow or dividends will be affected or not.
So far i think they won't n thats good enough for me.
lol...
some pple might think this type of thinkinb too simple liao
Hi bro8888,
Haha, it's just a mathematical model to estimate things. But the drawdown - those actual dips in portfolio - are actually the one that makes us most upset and may derail us from our best laid plans.
Hi Low Paul,
That's indeed true. I guess that's what bro8888 said about dividends being painkillers! No dividends and you see the stock tank down, you'll feel pain! But with dividends, you can relieve that pain somewhat, Haha!
LP,
No fear, Mr Market is not stupid... Very rational.... look at today.... Zzzzz
In fact, makes me wonder if Mr Market is too greedy...
This is the third time a sharp fall follows by a recovery... Maybe not STI, but look at the companies badly sold down, they all recovered...
Hi SI,
Haha, the price recovering could be due to people buying or shorters buying back. If it's the former, it'll be a genuine recovery and if the latter, it'll be just the start of another wave :) But we don't have to make life so complicated...if you smell blood, just cover your eyes and buy some LOL!
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