An exploration of how path or sequence of returns affects compounding.
The compounded case is better when we trend and worse when we “chop”. If bet a fixed percent of our bankroll fair coin toss game we are in compound return land. Compounding is not “bad”, it just alters the distribution of our terminal wealth
Lessons from compounding coin flips
Your overall expectancy is zero because the common chop balances the rare but heavily compounding trends.
Paths affect distribution of p/l even if they don’t affect expectancy.
Since we actually experience “path” and all its attendant emotions, it pays to think about the composition of expectancy and returns.
Fees need to be considered in light of the strategy. This requires being thoughtful to understand the levers. Unless you are comparing 2 SP500 index funds, it’s rarely as simple as comparing the headline fees. If we all agree that fees are not only critical components of long-term performance while being one of the few things an allocator can control, then misunderstanding them is just negligent. A one size fee doesn’t fit all alternative investments so a one size rule for judging fees cannot also make sense. Compared to the difficulty of sourcing investments and crafting portfolios getting smart about fees is low-hanging fruit.