Knowing the average return of a particular investment region, asset class or strategy only helps you in a minor part of your planning.
But many of you tend to overemphasize on average returns so much that, the culprit of an overconfident and less conservative plan might be yourself.
Joe Wiggins, who currently work as Director of Research at St James Place and author of the book The Intelligent Fund Investor wrote a good piece about this concept call Ergodicity.
Ergodicity is very related to the topic that average return can mislead your investment decision-making easily.
The main idea behind ergodicity is that there is a difference between:
The average result produced by a group of people carrying out an activity and The average result of an individual doing the same thing through time
Here are a few things if there is a difference:
One number is bigger than the other. The reality may shock you if you expect both numbers to be the same. Very often, the best decision takes into consideration Math + Real Impact. Most people may only consider one.
Joe gave us a few examples to understand the difference between an Ergodic and a non-Ergodic system.
Playing A Game of Russian Roulette as a Group Versus an Individual.
If you decide things solely based on math, then you would play a game of Russian Roulette with a group of people:
You have a gun that holds 6 bullets but only has 1 in the chamber. You use the gun to play Russian roulette with a group of 19 other people. Each person takes a turn to spin the gun chamber, then hold the gun to your temple and pull the trigger. If you are successful, you win
