Back in college my favorite engineering professor liked to repeat an adage that I bet everyone has heard at some point:

There’s no such thing as a free lunch

I believe the first time I heard that phrase it was in reference to a literal gathering where they were enticing students with free pizza, and my professor astutely noted that, make no mistake, you were going to pay for it in some way. Nothing is ever truly free, and there was bound to be a call for your time or money as part of the deal. Of course he was right, as the string attached to that pizza was an eye-rolling sales pitch I really could have done without.

Traditionally the week before the New Year is the time when most blogs reflect on the past or ponder the future, but like the excited kid who just can’t wait to blurt out what he got you for Christmas I’ve got something special I really want to share. Between the turbulent financial markets that seem to have many investors questioning their portfolios, some fun tools that I’ve been tinkering with to help, and the college football bowl season that has me in the competitive spirit, there’s no time like the present to share one last holiday gift. So let’s save the melancholy contemplation and snarky lists for another day and have a little fun with some really interesting financial data.

Who is up for a good old-fashioned portfolio competition?

If you’re one of the millions of people launching into the gift-buying spree this holiday season, then there’s a good chance you’re inundated with numbers right now.  From
performance statistics and customer ratings to price points and discount percentages, smart shoppers are in a constant search for the best bang for the buck.  Even if you’re not the type of impulse shopper that particularly enjoys the experience of browsing the aisles for just the right gift, experienced marketing professionals have learned that maximization of value is a powerful motivator that can pull even the strongest introverts into crowded stores against their better judgement.  Why do you think they spend so much money on Black Friday ads touting record-breaking deals?

After a lifetime of this type of shopping conditioning, it’s no wonder that this same maximization mindset might bleed into other decisions as well.  Like, for example, what asset allocation you might choose for your life savings.  So the same highly intelligent shoppers often create very similar lists of investing options sorted by the most common performance metric available — average return.  Just like how you might seek the best resolution for a new computer monitor or the highest customer rating for a new toy, you surely want the highest average return for your hard-earned savings.  Right?  

Unfortunately it’s not that simple.  Contrary to your data-driven instincts, averages lie.  So take a break from your holiday shopping, find a comfortable chair with your favorite drink, and let’s talk about how averages distort our thinking.

If you’ve been paying any attention at all to financial news this week, you’ve probably heard about the large 19% drop that Facebook experienced on Thursday.  Facebook is the fourth largest company in the US by market cap — behind only Apple, Microsoft, and Amazon — and the total loss amounts to a staggering $120 billion wiped out.  That’s easily the largest single day loss by one company in recent stock market history, and if you’re personally holding a lot of Facebook stock you’re probably not a happy camper.

But let’s say you’re more the index investor type than the individual stock picker.  Should you be worried?

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.