This odds fits perfectly with options trading. If you’ve read any of the books from Nassim Nicholas Taleb, you may be familiar with the terms “fat tails” and “black swans”. Basically, black swans are events that according to natural distribution should be very rare but yet happens often in the stock market. A brave options trader who sells puts can continually make money in the typical market — a lot of money. However, when black swans happen (Black Friday, Russians defaulting on bonds, 9/11), such events completely wipe your funds out. Here’s an article describing such a simple strategy:

http://www.econbrowser.com/archives/2005/11/hedge_fund_risk.html

7 year run of 41% annualized returns and then black swan in ‘99 wipes you out. Ordinarily, this would be a crazy investment idea — no one would willingly invest in a strategy that has a 14% chance of a -100% return in any given year. Except with the windfall stipulation where underperformance wipes you out at a 17% rate over 10 years, this strategy is the perfect fit. So you end up with an outcome table of:
* 14%: 0
* 86%: 50K x 3100% = 1.5M

By comparison, investing in simple stocks has an outcome of:
* 17%: 0
* 83%: 50K x 260% = 130K

In this case, you not only take more risk with stocks but accept much less returns for it. Now, before I undertook such a risky strategy, I would make sure all my assets were in vehicles protected from bankruptcy (like 401Ks, IRAs, cash value insurance). This is to cover the case where the market moves so fast that I am unable to cover my positions and I am on the hook for MORE than what I invested.

http://wyliemoney.blogspot.com/2007/05/real-scoop-managed-funds-index-funds-or.html

I feel confident that over 10 years, this portfolio will earn more than 6% a year on average.

I actually picked funds with a $2500 or lower initial minimum investment so $50,000 is exactly how much I would need to buy it all at once.

Also, I like your site and am adding a link to it to mine. Please link back!

As for investing in VTI, I think over-valued is only valid for short term investment. If I am going to hold it for 10, 20 years, why would I be concerned by how much is the stock selling now? If I only want to hold it for, say, 1 year, then I may consider if it’s the right time now.

Number of periods the SP500 has returned less than 6% during 1928-2006: 30 (38%)

Ordinarily, the odds table looks like so:
* 38% = $50K less than 6%
* 62% = $50K more than 6%

The stipulation changes the outcome like so:
* 38% = $0
* 62% = $50K more than 6%

In effect, it has turned an investment choice into a gambling choice. As a consequence, we should be looking for gambling options to compare it to. I’m not familiar with all the Vegas options so I don’t know exactly which game to play. But I’d pick the one closest to 50:50 odds and then throw everything down on a single hand/roll/throw. That would produce an outcome table of:
* 52% = $0
* 48% = $50K 100%

While the odds of ending up with nothing has increased from 38% to 52%, the rewards of success are up 10X. This is a far better risk/reward ratio.

For a longer timeframe (say 5 years to produce 6% annualized returns), Golbguru is closest to the answer. Let’s look at the historic numbers.

Number of 5-yr periods the SP500 has returned less than 6% during 1932-2006: 21 (28%).

Odds a bit better in your favor but nearly 30% is is quite the risk. My strategy here would not be Vegas but to start a small business (restaurant, boutique clothing, flowers, etc). Small businesses have big failure rates but they also have far higher returns than passive investments — otherwise, why would people take the risk of losing the entire investment versus only losing X% in stocks/bonds? Again, the stipulation removes much of the risk for what normally is a risky proposition. You already have a high chance of losing it all — pick an option with high returns with matching risk to the stipulation. If you succeed, you have a successful business returning 25% ROI on top of your replacement salary.