I can’t help you to divine where the stock market will be heading next week, but I can show you a formula that tells you what return you can expect will earn if you follow a buy and hold strategy over the long term. There two key phrases in my sentence: “buy-and-hold” and “long-term”. The formula estimates the average return on your investment assuming you are a patient investor expecting a long-term reward from the stock market. It is not a speculator’s formula.

Here is the formula:

g ≅ µ – (1/2)σ²

On the left-hand side, g is the average compound rate of return on a buy-and-hold investment (say a stock portfolio). g is also known as the geometric mean rate of return.

The word “compound” implies that one simply allow short-term (say, monthly) returns to snowball into something bigger. The “snowball effect” is aided by your investment’s simple average return, also