Requisites for Long-Term Growth in Financial Markets

We investigate multi-period investments where the initial capital and its gains are reinvested after each trading period. We point out that holding higher return investments even in the long run can be disadvantageous since, if the mean of a risky investment does not exceed the variance increment considerably, the investor cannot rely on positive growth of capital. We present the optimal trade-off between the single period mean and variance which provides maximum growth if the return distribution is not highly skewed and higher moments are negligible. Our approach is tested using the S&P 500 constituents in the period from 1970 to 2008