Have you ever played Russian roulette? I certainly hope not. Russian roulette might be a good bet when using arithmetic averages (on average, you win five out of six times), but according to geometric averages, you’re a lot better off not playing Russian roulette — you’ll eventually lose once, and that loss will kill you. (In other words, please don’t ever play Russian roulette.)Losing a chunk of your capital is not as deadly as losing in Russian roulette, but I believe investors should approach portfolio losses with the same trepidation. This is why you need to calculate your investment returns using geometric averages and — even more important — why you need to have an investment strategy that minimizes downside risk and prevents total loss of capital.
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