Money Management
Capital allocation is more important than strategies. Below are three directions that you can dig if interested. One doesn't exclude each other.
- Permanent Portfolio. The capital is equally divided in four parts: equities, physical gold, long term bonds, and short term bills (or cash). This is a defensive approach which implements the old adage "don't put all your eggs in one basket" and results in having at least one basket increasing in value in any market condition. A fund based on the permanent portfolio principle has scored an average 6% a year since 1996.
- Modern Portfolio Theory. This is a statistical model of allocation between strategies, funds or equities, according to their average performance, volatility and correlation. It aims at calculating a curve on which performance and risk can be theoretically optimized. Some mathematical hypotheses have been proven unrealistic but this model is still widely used among professionals.
- Game Theory and Information Theory have developed some models, the most famous by J. L. Kelly. Kelly's formula doesn't give a so complete answer as Modern Portfolio Theory, but it makes less irrealistic hypotheses and is easier to calculate. Its value gives the theoretical percentage of an available capital to bet on a strategy to maximize performance on the long term. In reality this should be considered as the maximum limit. We use it as a probabilistic indicator of robustness. The higher the result, the more reliable the strategy.
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