With the stock market recently dropping more than 10% in a short amount of time, I’ve noticed a lot of panic in financial circles. Beyond the fairly steep short-term loss there’s also the fear that a much more painful long-term correction may finally be starting, and stock market investors are understandably on edge.
Do you worry that your life savings are about to catch fire and burn to the ground? Setting aside what is causing the drop, whether it portends a major correction, or even whether you should be all that concerned about it in the long run, I’d like to focus for a moment on your very real anxiety and what you can absolutely do about it.
I’m personally not worried in the slightest, and it’s not because I’m some sort of investing robot who never gets upset. It’s because I would not have known that there’s such a major stock correction from looking at my own account balances, as a panic-inducing drop just isn’t there. While comparing relative portfolio performances over just a few weeks is pretty pointless, in this case it’s definitely not a matter of luck but of very deliberate structural portfolio planning. When I invested my money, I took the time to build firewalls.
Investors have a real knack for over-thinking things. There are those who imagine themselves as master traders controlling hundreds of variables at once like rocket scientists or professional sound mixers and squeezing out every last decimal of performance. And of course there are inexperienced types who also imagine investing works like that but who lack the confidence to even start learning. Personally I believe this complexity myth is disruptive to the well-being of both sets of people, and nowhere do I see this more than in the simplest of investing topics — cash.
Perhaps you’ve noticed the tag line for Portfolio Charts:
A Picture Is Worth a Thousand Calculations
While obviously a play on words to a common phrase that figuratively captures the descriptive power of images, some may not be aware that in the context of the site it is actually quite literal. Lots and lots of calculations go into every image, and I thought it might be fun to illustrate just how deep the rabbit hole goes.
Thanksgiving is maybe my favorite holiday of the year. Between family, football, and an insane amount of delicious food, the fourth Thursday of every November is something I always look forward to.
But while the traditions of Thanksgiving are something I hold dear, the traditions of the day that follows are something I’ve never really gotten into. Of course I’m talking about Black Friday, when shoppers get a day off of work to recover from eating too much and line up early in the morning to experience things like this in search of a good deal:
One of the things I’ve found most interesting in the feedback I’ve received with Portfolio Charts is the diversity of people who appreciate it. Whether it’s an investing newbie eager to learn about index investing, a an experienced investor comparing portfolio options, or even an occasional professional fund manager interested in the calculation methodology, it’s exciting to see so many people find value in the clear and unbiased representation of good data.
In an effort to offer a helping hand to the first of those groups, I created a new page to outline the basics of how to use the information on the site to build and manage a portfolio of your own. It’s just a start, and I do plan to expand that type of information over time, but luckily it’s really not that complicated! So if you’re new to investing or know someone else looking take the plunge, that’s a good place to start.
But every good explanation of “How” deserves an equally good explanation of “Why”. This is something we all need to be reminded of occasionally no matter where we are in our individual investing experience.
Discussing investments with others is often a minefield of competing information. Two highly educated people can look at the exact same numbers and come to completely different conclusions about the results. Information from primary sources even as reputable as Vanguard does not necessarily make the situation any better, as the same fund can appear wonderful in one tool but disappointing in another. How on earth can an everyday investor find an appropriate portfolio when even the experts can’t agree on what is good and what is not?
The important takeaway is not that risk and returns are unknowable or that everyone who disagrees with you is bad at math. The problem most often arises from the natural desire of humans to reduce complex problems down to a single straightforward number. The real world is more complex than most people understand, and the assumptions by which they derive that number can greatly affect the results. Whether they realize it or not, most investors — casual and professional alike — cherry pick data every day.
Everyone loves a good cup of coffee. It’s one of the most popular beverages in the world, and if one were to poll a random group of passers-by on the street it’s very likely they’d find a good percentage of people who identify as frequent coffee drinkers. But offer those biggest fans a free cup of home-brewed coffee, and there’s no guarantee they’ll like it. While people often talk about coffee in universal terms, everyone has a specific type and combination of ingredients that they like best and a caramel macchiato with extra foam tastes much different than a strong coffee served black. The devil is in the details.
Stocks are kind of like coffee in that regard. Lots of people love them and sing their praises, but that doesn’t mean that all types of stocks are equally appealing to all people. Walking into a fancy coffee shop with a big menu and just asking for “coffee” may not necessarily yield the results you will like, and walking into your brokerage and announcing “I’d like some stocks, please” might elicit a few funny looks. What types of stocks? The ones you choose may drastically change your portfolio outcome, and lumping them all together as a single homogeneous entity sorta misses the point. In coffee and in stocks, it’s important to be specific.
My single favorite toy as a child really wasn’t a single toy. It was my giant bucket of LEGO accumulated over many years. The beauty of LEGO is that the combinations are absolutely limitless and the things you can build with them are constrained only by your imagination. Well… and access to all the right pieces.
You see, when building a spaceship, race car, or castle it’s sometimes not good enough to have a big bucket of parts. You need to have the right parts. The right color for the walls, the right size to fit in a tight space, or the right shape to make a respectable wheel or wing. Many hours were spent browsing the toy aisle not for the final product pictured on the box, but for just the right part in the kit to add to my collection. Without the right building blocks, the best designs just aren’t the same.
For a while now Portfolio Charts has been focused on the LEGO kits — the portfolios that you can build for yourself and the calculators to help you do it. But I’ve known for a while that it’s been missing an important ingredient. Today I’m happy to unveil brand new section to the site dedicated to the portfolio building blocks themselves — Assets.
Perhaps the perennial top rated roller coaster in the United States is Millennium Force at Cedar Point in Sandusky, Ohio. With a max drop of 300ft at 80 degrees and a top speed of 93mph, reviews are predictably glowing and full of adrenaline.
“Best ride in the world!! It’s so fun, you feel like you’re flying.”
“GREATEST RIDE IN THE WORLD. ENOUGH SAID.”
“The best ride there! So fast, so extreme, amazing drop. No matter how long the line is make sure you go on the ride.”
Just as interesting to me is a stat you won’t find. At a length of 6595 ft and a duration of 2:20 from start to finish, the average speed of the coaster is a pedestrian 32mph and would be considered safe in your home neighborhood. If some robotic fan only judged amusement park rides by average speed, the drive there would blow it out of the water. And a grandmother picturing a smooth leisurely ride would be in for a very rude awakening. Clearly, averages don’t tell the whole story.
So why is it that when discussing investing people love to reduce portfolio performance down to a single long-term average? Just like discussing roller coasters only in terms of averages, that masks the entire experience of the ride!