Theory

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.