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The Skinny on Options: Abstract Applications

Return Sequences

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Today, we pick up the discussion we started last week about portfolio returns over time. While we now know that returns are indeed multiplicative over time, we see today that the sequence of those returns is critically important, too. Interestingly, given the same average returns over a given time period, the ending portfolio result will not differ between two sequences. But as we discuss today, how you feel and react to different returns (especially the big drawdowns) is drastically different and must be acknowledged.

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