The Half Kelly method is a popular investment strategy that was first introduced by John Kelly, a mathematician at Bell Labs, in the 1950s. The strategy is based on the principle of maximizing long-term growth while minimizing short-term risk.
The idea behind the Half Kelly method is simple: invest half of your optimal Kelly stake. In other words, if the Kelly criterion suggests that you should invest 20% of your portfolio in a particular asset, the Half Kelly method would have you invest only 10%.
By investing less than the optimal Kelly stake, you reduce your exposure to risk and increase your chances of long-term growth. This is because the Half Kelly method allows you to withstand short-term losses without jeopardizing your overall investment strategy.
For example, let’s say you’re considering investing in a stock that has a 60% chance of going up and a 40% chance of going down. The potential payout is $1 for every $1 invested, and the potential loss is $0.50 for every $1 invested.
Using the Kelly formula, we can calculate the optimal stake as follows:
This means that you should invest 40% of your portfolio in this stock if you want to maximize your long-term growth.
However, if you’re using the Half Kelly method, you would invest only half of the optimal stake, or 20% of your portfolio. This reduces your risk and allows you to withstand short-term losses without compromising your overall investment strategy.
The Half Kelly method is a popular investment strategy that can help you manage your risks while maximizing your long-term growth. By investing only half of your optimal Kelly stake, you reduce your exposure to risk and increase your chances of long-term success.
However, it’s important to remember that investing always involves some degree of risk, and no investment strategy can guarantee success. That’s why it’s important to do your own research, consult with a financial advisor, and make informed investment decisions that align with your own investment goals.