Why your portfolio may decline by 20% or more this year....or the next

There are a few reasons why you cannot win this game the way that the large financial institutions will have you believe, but the main reason being - asymmetrical risk that is not in your favour.
See, you are likely risking 100 dollars to make 5 to 10 dollars - now, you have have been told that this is acceptable risk. Ask yourself this - would you sit down at a table in the casino and place a 100 dollar bill on the table and be satisfied knowing that you will likely make 5 to 10 dollars, but could theoretically lose 100 dollars?
Nassim Taleb sums up this asymmetry problem quite well as he likens the practice to picking up pennies in front of a bulldozer. You may escape with your profit today, tomorrow, and the next day - but in the end probability will likely catch up with you - and your portfolio may not live to tell the tale.
Ideally, we would employ Taleb's bimodal, or barbell, strategy to allocate assets within our portfolio. Options would be required to achieve the type of leverage necessary to impact the portfolio in its entirety, but also to safeguard against losses. For those unaware of this strategy it resembles an uneven barbell (ex. 90% cash, 10% options). The greatest loss you could, possibly, realize would be 10%, but your potential gains would be matched to your current asset allocation, or perhaps, even more aggressive given that you now have set a floor for losses.


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