“In his book The Ages of the Investor, William Bernstein describes a mythical employer named Uncle Fred who offers investors a retirement savings scheme determined by the flip of the coin. One side of the coin results in a +30% annual gain while the other side gives you a -10% loss in a given year.
Since the coin toss gives you a 50/50 shot at each outcome, this would give investors a compounded annual return stream of around 8.2% with a 20% standard deviation, not too far from the actual long-term results in the stock market.
Now let’s say you decide to contribute $1,000 each year for the next 40 years into Uncle Fred’s scheme. And let’s further assume the coin flip works out to give you 20 positive return years in a row followed by 20 negative return years in a row. In this scenario, you would end up with a little more than $100,000. Not bad, but you barely kept up with the long-term inflation numbers. “