There was a mathematical genius that lived in 19th century Victorian England named Galton. There was a triangle invented by Paschal a 17th century French mathematical genius. The work of these two don’t define reality but it completely informs reality. Paschal invented his famous triangle:
You can read about the magic of Paschal’s Triangle here
It turns out the first reference was by the Chinese in the early 14th century and was used as a calculating machine. Francis Galton invented a means to animate Paschal’s triangle It’s worth watching the progress of the balls as they settle from the collection bin into the distribution. The distribution of course is the famous Gaussian distribution described by mathematicians and gamblers Gauss and Adrain in the 19th century but hinted to by Galileo in the 16th century. Galileo noticed errors were distributed. Small errors more likely than large errors which then leads one to ask what is error accumulation and how does error accumulation effect things? The answer of course is the effect can be massive or indiscernible since errors can be of either sign and can add or cancel. This is the concept of sequence of return risk from the 16th century.
David Byrne et. al. put it this way:
And you may find yourself
Living in a shotgun shack
And you may find yourself
In another part of the world
And you may find yourself
Behind the wheel of a large automobile
And you may find yourself in a beautiful house
With a beautiful wife
And you may ask yourself, well
How did I get here?
Where you end up is a function of a normal distribution of millions of decisions.
Notice that one lone ball way out in the right tail. How the hell did he get there and what is the probability? (the answer is 2^14) This assumes the board is level and gravity is acting equally on each ball and there is a 50/50 probability of a ball bouncing left or right at any given peg. Tilt the board the odds change. Here is the story of how you got there. This is how life works in a probabilistic universe, and you can use that to qualify your risk and effect where you end up. If you constantly make rightward choices you end up in right bins. Left choices, left bins. This example belies the silliness of the expression “you can’t beat the market so invest in low cost mutual index funds” . What that statement defines is the 50% bin. Clearly A LOT of balls beat the 50% bin. So the next time you hear someone quacking that party line tell ’em “you’re a clueless dumb ass” because they are. The way you end up on the left of the 50% bin is to make leftward choices. The next time you hear someone quacking about 4% x25 understand it depends. In a 50/50 portfolio counting from the left that puts you in bin 6 or so (98% chance of success). 80/20 moves you to bin 7 from the left. 99/1 gets you to maybe bin 8. Yes you can beat the market but the market can also beat the hell out of you by rightward decisions instead of leftward decisions. People do this all the time, claim you can’t beat the market and then proceed to try and beat the market by using real estate or by taking monstrous equity risk in their portfolio. People sit around with cash in the bank which they intend to invest but just can’t bring themselves to invest “waiting for a pull back”. This is called market timing and market timing can be a leftward decision, except you have to know when an event leans left which implies you need rules for trading that force leftward decisions. An example of leftward market timing is re-balancing to a predetermined portfolio risk level every so often. The mechanical nature of re-balancing forces leftward decisions. Sitting around waiting for a pull back merely means your portfolio is not risked correctly and money you intend to put at risk to procure some profit is not doing the job, a decidedly rightward decision cloaked in a leftward delusion. Lets say you choose to “MAX OUT YOUR PRETAX accounts” ever hear that one? Is that a leftward or rightward decision? How did you get here? You let the days go by. What that means is you wind up with a huge pretax pile some of which is owned by the government and at age 70 is wholly controlled by the government. RMD is progressive and taxes are progressive so the government by law is going to take a (progressive)^2 tax bite. Here is what happen in a (progressive)^2 scenario:
The red line is the ever evolving tax bite eaten by the government in retirement. The black line is money already taxed. Over time black beats red. Betting red was a rightward decision, black a leftward decision. It just took some time to manifest itself, yet people quack that nonsense all day long. A better tactic (and the leftward decision) is some of each and to optimize that ratio along the way. To understand that you need to understand what each account will be used for in funding retirement and the rules of taxation for each account going in and coming out, so you can make leftward decisions. Do not just let the days go by or it will be the same as it ever was.
I took a little break from the blog to live my life. I bought some Udemy courses on various topics on black Friday for $10 each, topics heavy into computer programming, micro controller programming, excel programming and a few others. Udemy is a little better choice than Youtube since you can correspond with the lecturer. I also completed my CME to keep my medical license active and I’ve been doing stuff in the yard since it’s FL and 70 degrees outside. It’s a great time to make some vitamin D in FL. I’ve really started to whittle down my blog involvement especially other blogs since the information contained is often useless if not actually wrong. Some sites are so agenda and marketing driven as to be unreadable. Some sites conflate ideas into a miss mash of gobbledygook and then dole it out in “10 Bullet Points of Nonsense”. If if the adage is “it’s 20% content and 80% marketing”, that’s another way of saying “you can rely on 80% of what I say to be BS!” Who needs it? I started working on an outline for a non Bogglehead approach along the above lines of processing probabilities in making financial plans. We’ll see where that goes. May be worth while may be a piece of junk.