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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Hi gang... wow!!! Date: 9/15/2013 11:53 PM
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See post #72810

I confess I didn't understand a lot of that post, but it didn't really show how the two strategies compare. Where are the actual calculations?

In that post you write
Example;
If S&P ‘all-in’ average return, with dividends, is 14%
S&P max drawdown is 53%

= 14% (1 – 53%)
= 14% (47%)
= 6.58%


This seems wrong. The average 14% return includes the drawdowns. You are counting them twice. Further by subtracting 53% of the returns from the annual average return, you are assuming the 53% drawdown happens every year.

If Account #A has a risk of 50%+ drawdowns, then it's risk-adjusted returns are its gross returns times 1-drawdown. At a 50% drawdown, the risk-adjusted returns are 50% of the gross returns. At a 25% drawdown the risk-adjusted returns are 75% of the gross returns.

This makes the same mistake. The drawdowns only happen occasionally. Averaged over many people, you get the 14% despite the drawdowns. Some will be unlucky and get less, others will be lucky and get more.

I still don't see a clear argument for why IULs beat S&P.
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