This chapter took you through some basic, but important, investment-related calculations. We then walked through the modern history of risk and return. How should you, as an investor or investment manager, put this information to work?

      The answer is that you now have a rational, objective basis for thinking about what you stand to make from investing in some important broad asset classes. For the stock market as a whole, as measured by the performance of large-company stocks, you know that you might realistically expect to make 12 percent or so per year on average.

      Equally important, you know that you won't make 12 percent in any one year; instead, you'll make more or less. You know that the standard deviation is about 20 percent per year, and you should know what that means in terms of risk. In particular, you need to understand that in one year out of every six, you should expect to lose more than 8 percent (12 percent minus one standard deviation), so this will be a relatively common event. The good news is that in one year out of six, you can realistically expect to earn more than 32 percent (12 percent plus one standard deviation).

      The other important, practical thing to understand from this chapter is that a strategy of investing in very low risk assets (such as T-bills) has historically barely kept up with inflation. This might be sufficient for some investors, but if your goal is to do better than that, then you will have to bear some amount of risk to achieve it.