coming out of depression, small stocks in the U.S. earned their highest one year
ID: 2679682 • Letter: C
Question
coming out of depression, small stocks in the U.S. earned their highest one year historical return of 143% in 1933. However, in the four years prior to that you would have lost (going from 1929 to 1932, in order) about 50%, 40%, 50%, and 5%. Suppose you started into this five year stretch with $10,000 invested. How much did you still have heading into 1933 ? how much would you have at the end of that year ?Based on these numbers, do you think the 143% return should be included in the return
series ?
Explanation / Answer
If you began with $10,000, your investment declines (year-by-year) to $5,000, $3,000, $1,500, and $1,425. So, you begin 1933 with only $1,425 left. At the end of that year, you have $3,463, a far cry from your starting point of $10,000. The astute student will point out that by the time the 143% return rolls around, the value of the investment has declined so much that the large single return is due in part to the low amount of funds invested at the start of that year. Nonetheless, the return should be included in the series. In fact, this period of time significantly reinforces the lessons we draw from this series of returns.
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