Anyone Kelly betting their investments?
I.e. taking the mathematically optimal amount of leverage. So if you’re invested in the sp500 this would be 1.4x. More or less if your portfolio has higher or lower risk adjusted returns.
I’m not, and don’t know anyone who is. Partly because it’s VERY HARD to identify the actual future expectation and variance of real-world investments (hint: it’s probably not normal, and bets aren’t independent—tails matter more in reality than in most models), and partly because my total bankroll was mostly in future earnings, not invest-able assets. Also, because my main debt and largest single investment is my house, which is not easily divisible.
Some people are investing with leverage (or investing in levered assets, or over-leveraging by borrowing to invest in hidden-leverage investments), but very rarely (never, AFAIK) using the Kelly Criterion as their primary calculation. I know a few professional gamblers (poker, sports, and other advantage-play), who do use the Kelly calculations as part of their decisions, but they acknowledge it’s full of estimates and use it as a red flag when they’re way off, rather than a strict limit.
I think it’s at the very least clear for the majority of investments, leverage of 1 is suboptimal even if you assume future returns are lower and volatility is higher.
I’m not certain of that—depending on leverage options and rates, and one’s estimate of investment expectation and variance, it may be that no leverage (or negative leverage—putting some amounts in ultra-safe but low-return options) is correct.
Also, don’t think of “individual investments” or even “accounts” or “types” as the unit of optimal betting calculation. Kelly’s calculations work over an investor’s decisions across all of their investments, and are suboptimal if applied separately to multiple slices.
I apply kelly criterion to all investments I control. It doesn’t take much for leverage to be worth it, excess returns of 7% and a standard deviation of 12% still imply greater than 1 leverage.
Anyone Kelly betting their investments? I.e. taking the mathematically optimal amount of leverage. So if you’re invested in the sp500 this would be 1.4x. More or less if your portfolio has higher or lower risk adjusted returns.
I’m not, and don’t know anyone who is. Partly because it’s VERY HARD to identify the actual future expectation and variance of real-world investments (hint: it’s probably not normal, and bets aren’t independent—tails matter more in reality than in most models), and partly because my total bankroll was mostly in future earnings, not invest-able assets. Also, because my main debt and largest single investment is my house, which is not easily divisible.
Some people are investing with leverage (or investing in levered assets, or over-leveraging by borrowing to invest in hidden-leverage investments), but very rarely (never, AFAIK) using the Kelly Criterion as their primary calculation. I know a few professional gamblers (poker, sports, and other advantage-play), who do use the Kelly calculations as part of their decisions, but they acknowledge it’s full of estimates and use it as a red flag when they’re way off, rather than a strict limit.
I think it’s at the very least clear for the majority of investments, leverage of 1 is suboptimal even if you assume future returns are lower and volatility is higher.
I’m not certain of that—depending on leverage options and rates, and one’s estimate of investment expectation and variance, it may be that no leverage (or negative leverage—putting some amounts in ultra-safe but low-return options) is correct.
Also, don’t think of “individual investments” or even “accounts” or “types” as the unit of optimal betting calculation. Kelly’s calculations work over an investor’s decisions across all of their investments, and are suboptimal if applied separately to multiple slices.
I apply kelly criterion to all investments I control. It doesn’t take much for leverage to be worth it, excess returns of 7% and a standard deviation of 12% still imply greater than 1 leverage.