Four Assets, Four Personalities

I

Meet the players

In Part I we built the toolkit: variance, the Kelly Criterion, geometric vs. arithmetic returns, systematic risk, correlation, and tail events. Now we apply those tools to four asset classes that most investors actually consider. Each has a distinct personality — a different balance of return, variance, and ruin potential.

II

Returns — the headline that hides everything

If you only look at returns, the ranking seems obvious. Bitcoin dominates, tech outpaces the broad market, and real estate trails. But Part I taught us that the headline return is the arithmetic average — the number that lies. What matters is what your money actually did: the geometric compound rate, net of the variance tax.

The table below shows the approximate growth of $10,000 invested in each asset class from 2015 to 2025. On a linear chart, Bitcoin would make everything else look like a flatline.

Bitcoin’s compound annual growth rate over this period exceeded 50%. The NASDAQ 100 delivered roughly 18% annualized. The S&P 500 came in around 15%. Real estate, including rental income, delivered approximately 8–10%. Those are the numbers people share at dinner parties.

Now let’s look at what those numbers cost.

III

The variance tax — what returns cost

From Part I: variance silently destroys geometric growth. Two assets can have the same arithmetic return but wildly different geometric outcomes. The formula linking them is approximately:

This is the variance tax. The higher your volatility, the more of your arithmetic return gets consumed before it reaches your actual wealth. Bitcoin pays the highest variance tax of any major asset. Its arithmetic average monthly return has been around 7.8% — spectacular. But annualized volatility of 50–60% means roughly 12–18 percentage points of that return are consumed by the variance drag.

Real estate’s advantage becomes visible here. Its total return of 8–10% comes with roughly 10% annualized volatility — meaning the variance tax is tiny. Almost all of the arithmetic return converts to geometric growth. The S&P 500 sits in a comfortable middle: moderate returns, moderate variance. The NASDAQ 100 pays a higher tax than the S&P for its higher returns. Bitcoin pays the highest tax of all — but its gross returns have been so extreme that even after the variance drag, the net geometric return has been extraordinary.

The catch: that only works if Bitcoin’s future arithmetic returns remain extreme. If they moderate toward equity-like levels while volatility stays elevated, the variance tax alone would make it a mediocre or negative geometric investment.

IV

Drawdowns — can you survive the valley?

Part I’s Kelly Criterion depends on ruin tolerance: how much can you lose before you’re knocked out of the game? Here is where the four assets diverge most dramatically.

The NASDAQ 100 lost 83% from the 2000 dot-com peak to the 2002 bottom — and took over 15 years to recover. Bitcoin has experienced drawdowns of 80%+ at least three times. An investor who put 100% of their capital into Bitcoin at the 2021 peak saw it drop to $16,000 in 2022 — a 76% decline. The S&P 500’s worst was a 50% crash during the 2008 financial crisis, recovering in roughly 5.5 years.

Real estate’s maximum drawdown of roughly 33% during the 2008 housing crisis understates the real damage, because real estate is typically leveraged. A 33% price decline on a home bought with 20% down wipes out 165% of your equity — you’re underwater, owing more than the asset is worth.

The maximum drawdown is not a risk metric. It is a survival filter. If you cannot hold through it — financially and psychologically — you have no business being in that asset class.

Applying Kelly’s logic: for an asset with 80% max drawdown, even a very high edge should lead to fractional Kelly sizing. No more than 5–10% of total portfolio in a single asset that can lose four-fifths of its value. This is not a philosophical preference — it is a mathematical constraint on geometric growth.

V

Correlation — the diversification question

From Part I: diversification works only when positions are uncorrelated. Two perfectly correlated assets provide zero diversification benefit — you’re just doubling your bet. So how do our four asset classes correlate with each other?

The most important finding: NASDAQ 100 and S&P 500 are highly correlated (~0.90). Holding both provides almost no diversification benefit — they crash together and rally together. You’re paying for two tickets to the same ride.

Real estate has the lowest correlation to equities (~0.25–0.35), making it the strongest diversifier in this set. Its returns are driven by local housing supply, rental demand, and mortgage rates — largely independent of daily stock market moves.

Bitcoin’s story is more nuanced. Before 2024, it was genuinely uncorrelated with equities — correlation near zero. This made it an attractive portfolio diversifier despite its extreme volatility. But as institutional investors poured in through Bitcoin ETFs, the correlation jumped to 0.5–0.87. Bitcoin increasingly behaves like a high-beta tech stock rather than an independent asset. Its diversification value has eroded precisely as more people have adopted it for that purpose.

VI

Risk-adjusted returns — the Sharpe ratio reality check

The Sharpe ratio measures return per unit of risk: how much excess return (above the risk-free rate) did you earn for each unit of volatility you endured? A higher ratio means more efficient return generation.

Real estate occupies the most efficient position on this chart: solid returns with the least volatility. Its Sharpe ratio of approximately 0.7–0.8 is the highest of the four, meaning each unit of risk buys more return than any other asset class here. The S&P 500 sits at roughly 0.65. Bitcoin, despite its explosive returns, lands at around 0.5–0.6 because its volatility is so extreme.

The NASDAQ 100’s Sharpe ratio is similar to the S&P 500’s — the extra return comes with proportionally extra risk. You’re not getting a free lunch from tech concentration; you’re getting a more levered version of the same ride.

The Sharpe ratio answers the Kelly question indirectly: given the volatility you must endure, is the edge actually worth concentrating into?

For most investors without genuine stock-picking edge, the data argues for broad equity exposure (S&P 500), a real estate allocation for diversification and efficiency, a small Bitcoin allocation for asymmetric upside (sized by Kelly logic — small, because the variance is enormous), and caution about NASDAQ 100 concentration unless you have a specific thesis about technology’s future that the market hasn’t priced in.