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As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns com

As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns completely to dust, if that one is outstanding it makes up for it all. We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market. [1] This is not an endorsement; my personal experience with their pool was mediocre at best.

jacquesm 3y ago
> if that one is outstanding it makes up for it all. It may well be outstanding and still not make up for it all. > This is not an endorsement; my personal experience with their pool was mediocre at best. That's the opposite of an endorsement!
- thfuran 3y ago
  >It may well be outstanding and still not make up for it all. That sounds like, at best, pretty great.
eru 3y ago
> As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns completely to dust, if that one is outstanding it makes up for it all. I doubt that qualitative assessment holds up when you add some numbers. As a thought experiment, imagine a portfolio that generally replicates the S&P500, but also sells covered out-of-the-money calls on all the stocks. (Whenever a call triggers, you re-balance your portfolio. Let's ignore transaction costs for now.) According to the efficient market hypothesis, the portfolio sketched above will have roughly the same average returns as the S&P500. Especially if the calls sold are far-out-of-the-money.
geysersam 3y ago
> As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. Reminds me of the gamblers ruin paradox. In some games even if the expected payout from each round is positive, it can be shown that the gamblers wealth goes to 0 over suffiently large time scales with probability 1.
- chrinc9203 3y ago
  > it can be shown that the gamblers wealth goes to 0 over suffiently large time scales with probability 1. In real life, the time scales are not long enough and the number of N samples in one’s life is too small. This is why retirees over age 60 are concerned with “sequence risk”. That is, you get unlucky VTI/VOO/S&P returns for 5 years, but you don’t live long enough for the average to come back to 8-10%. Downside risk becomes more important than average return.
  - jedberg 3y ago
    I have the same sequence risk when I gamble. I know the average is that I should lose, but I also know I'll never play enough in my lifetime to get enough samples. So I play games that are more likely to have sequences -- hand shuffled blackjack -- and more likely to win quickly and loose slowly -- the don't in craps.
lotsofpulp 3y ago
> We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market. I believe I saw data that showed this has always been the case, but I can’t quickly find it.

jacquesm 3y ago

> if that one is outstanding it makes up for it all. It may well be outstanding and still not make up for it all. > This is not an endorsement; my personal experience with their pool was mediocre at best. That's the opposite of an endorsement!

thfuran 3y ago
>It may well be outstanding and still not make up for it all. That sounds like, at best, pretty great.

eru 3y ago

> As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns completely to dust, if that one is outstanding it makes up for it all. I doubt that qualitative assessment holds up when you add some numbers. As a thought experiment, imagine a portfolio that generally replicates the S&P500, but also sells covered out-of-the-money calls on all the stocks. (Whenever a call triggers, you re-balance your portfolio. Let's ignore transaction costs for now.) According to the efficient market hypothesis, the portfolio sketched above will have roughly the same average returns as the S&P500. Especially if the calls sold are far-out-of-the-money.

geysersam 3y ago

> As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. Reminds me of the gamblers ruin paradox. In some games even if the expected payout from each round is positive, it can be shown that the gamblers wealth goes to 0 over suffiently large time scales with probability 1.

chrinc9203 3y ago
> it can be shown that the gamblers wealth goes to 0 over suffiently large time scales with probability 1. In real life, the time scales are not long enough and the number of N samples in one’s life is too small. This is why retirees over age 60 are concerned with “sequence risk”. That is, you get unlucky VTI/VOO/S&P returns for 5 years, but you don’t live long enough for the average to come back to 8-10%. Downside risk becomes more important than average return.
- jedberg 3y ago
  I have the same sequence risk when I gamble. I know the average is that I should lose, but I also know I'll never play enough in my lifetime to get enough samples. So I play games that are more likely to have sequences -- hand shuffled blackjack -- and more likely to win quickly and loose slowly -- the don't in craps.

lotsofpulp 3y ago

> We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market. I believe I saw data that showed this has always been the case, but I can’t quickly find it.