I was just re-reading a chapter on risk in a trading book I bought a few years ago, and came across an interesting observation:
Not exactly page one news for most traders/investors. But here’s the more interesting part:
According to the book, if you start with one stock in your portfolio and add one additional stock, your risk drops by 30%, a very significant change. With a portfolio of 3 stocks, it drops by 43%, and with 4 stocks, by 50%. But you start to get diminishing returns above 4 stocks, as can be seen by this table from the book:
At least once in their lifetime, every trader has been tempted by the seductive lure of the high win percentages and “easy” profits offered by Martingale money management (doubling/averaging down).
Its all nonsense of course, and every time I think about revisiting the Martingale, I force myself to take a look at the equity curve of a particular ES strategy on C2: