The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

Suppose that you had invested $10,000 in the S&P 500 in 1970, planning to cash it out forty years later upon your retirement in 2009. There were plenty of ups and downs during this period. But if you stuck with your investment through thick and thin, you would have made a profit of $63,000 when you retired, adjusted for inflation and not counting the original principal.95 If instead you had “played it safe” by pulling your money out of the market every time it had fallen more than 25 percent from its previous peak, waiting until the market rebounded to 90 percent of its previous high before reinvesting, you would have just $18,000 in profit—a meager return of 2.6 percent per year.96 Many investors, unfortunately, behave in exactly this fashion. Worse yet, they tend to make their initial investments at times when the market is overvalued, in which case they may struggle to make a positive return of any kind over the long term.