Unexpected Returns: Shannon’s Demon & the Rebalancing Bonus

Advanced

One of the core assumptions baked into all of the Portfolio Charts calculations is the idea that the portfolios are rebalanced once a year back to their target percentages. While that simple process seems rather mundane on the surface, there’s actually a bit of mathematical magic going on that often gets lost in broader portfolio discussions. Yes, maintaining your target asset allocation is an important part of risk management, but it goes so much deeper than that. What if I told you that, like a lonely plant in a barren desert, in the right conditions rebalancing can cause profits to seemingly appear out of nowhere?

That peculiar phenomenon can clearly have a major impact on the way people think about diversification in their investments. So let’s unpack the mystery and talk about the elusive rebalancing bonus.

Safe Investing in a Time of Uncertainty

Psychology

With everything going on in the world right now — protests, war, and floundering economic systems — it’s natural for even the most confident investors to have doubts. Our best plans are still based on certain rules and assumptions, and our own lived experience shades our perspective more than we probably realize. So when the world suddenly seems out of control and beyond our comfort zone, things we formerly took for granted feel a lot less stable. Like walking a lonely road with no idea what is over the horizon, it can be a unsettling experience.

Now I certainly don’t have the answers to every problem in the world. But when it comes to investing, the good news is that you actually don’t need those answers to protect yourself. The cool thing about studying financial history is that no matter how crazy things feel today it probably pales in comparison to events that your parents and grandparents dealt with. And by understanding how certain portfolios handled those stress tests, we can choose one more likely to stand the test of time.

So if you’re watching the news and worried about what it means to your important financial goals, here are a few tips for setting your portfolio up for success no matter what happens.

Three Secret Ingredients of the Most Efficient Portfolios

Advanced, Featured

December is often the time of retrospection and yearly wrap-ups, with stories recapping events of the last year and looking forward to new opportunities. In the finance space, you’ll find endless collections of the top performers of the year and forecasts for the one to come. While that’s all interesting and comforting in its own ritualistic way, this holiday season I decided to revisit a bold question that’s much bigger than short-term market news cycles:

What do the most efficient portfolios in history have in common?

Truly understand that answer, and much of the market noise that worries you from day-to-day and year-to-year loses its power over not only your emotions but also your account balances. So if you’ve ever wanted to think beyond your investing assumptions and explore the data for proven ways to approach timeless portfolio problems, grab a cup of coffee and pull up a chair. This article is for you.

Adversity Is the Pain You Don’t See Coming

Psychology

It was a beautiful, warm, sunny day without a cloud in the sky, and I took full advantage by going on a walk downtown and over the river to my favorite hill to sit and enjoy the view of the skyline. The scene was a welcome break from the stress that filled my life recently, as family issues were weighing heavily on my mind. But eventually an urgent text beckoned me, so I grabbed one of the many nearby scooters that fill urban settings these days. And off I went, the sun on my back and wind in my face, zipping through the bustling streets on my way home.

Familiar surroundings and pressing anxiety make for interesting bedfellows. On the one hand, I was in my comfort zone on a picturesque day. And on the other, my mind was racing to where I was needed most and the scooter kept a similar pace. A passing jogger here. A left turn there. And then boom. Maybe it was a bump in the road or a hair trigger accelerator — I honestly don’t remember. But the end result was a collision with an immovable concrete wall at an alarmingly high speed.

That was the last time I walked without crutches.

Find What You Need With Improved Portfolio Profiles

Updates

While most of us are thinking about Halloween costumes this time of year, retailers are frantically planning for the holiday shopping season. Looming supply chain issues may be the topics making headlines, but retail never sleeps and both manufacturers and merchants alike are busy creating display strategies for each available item.

Every company wants to show their product in the best light to help potential customers choose it over other options. From compelling specs that stand out in the crowd to a well-organized display that keeps people engaged, marketing teams have lots of tried-and-true techniques to capture customer attention. No matter whether we’re talking toys, jewelry, or perfectly pressed shirts, presentation really does make a difference.

In that same merchandising mindset, I just completed an overhaul of the Portfolios section with a focus on presentation. The goal is to offer much more information in an organized way so that portfolio shoppers can better understand each option and navigate their way to one that best meets their needs. So without further ado, let’s go through an example to see what the new portfolio profiles can do for you.

The Right Savings Rate Will Conquer Any Bear Market

Beginner, Goals, Tools

One of the things I like about the safe withdrawal rate is that it’s a rare financial metric that accounts for the worst case. While everyone else was comparing withdrawals to average returns, William Bengen had the foresight to study every investing period he could find and determine the maximum amount of money that a retiree could have safely withdrawn over 30 years even in the worst possible timeframe to retire. By flipping the problem from an exercise in chasing ever-shifting averages to studying worst-case scenarios, Bengen’s safe withdrawal rate really did make life after accumulation a lot safer for retirees.

Look at the title image of a pair of grain silos and imagine your comfort level with them filled with just enough grain to barely make it through an average year. Now picture them with enough grain to survive the worst famine on record. That’s a huge difference, and Bengen’s new perspective completely changed the way people think about retirement.

As helpful as that is, however, not everybody is in the phase of career and life where retirement is an impending concern. But I still find the approach enlightening, so let’s expand our thinking. Have you ever wondered what a similar metric might look like for accumulators seeking to guarantee long-term success in uncertain markets? Put another way, what percentage of your crop must you save in those silos every year in order to fill them by a certain date? And if the stored grain grows and shrinks on its own like money invested in stocks and bonds, how would that affect the results?

If that type of question feels as interesting to you as it does to me, this article is for you.

close up photo of water drop

Measure the Expense Ratio to Maximize Your Leaky Portfolio

Tools, Updates

Drip. Drip. Drip.

Do you hear that?

No, it’s not the old bathroom faucet driving you crazy by breaking the nighttime silence. If only it was that simple! One inexpensive gasket would fix that right up, but this is something much more insidious.

Drip. Drip. Drip.

It’s the sound of your portfolio leaking thousands of dollars a year.