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  • Kyle Grevengoed


A Multi-Fractal Walk Down Wall Street is an article that appeared in the February 1999 issue of the “Scientific American.” The title is in reference to a book entitled, “A Random Walk Down Wall Street” by Burton G. Malkeil. If you are unfamiliar with this book it can be summed with a quick little journey.

Imagine yourself riding the scrambler at the fair or amusement park. You are sitting in a quickly rotating chair AND that chair is rotating around another axis. When you get off you are most certainly a little dizzy (and if you are like me, feeling sick, if not actually sick, for the rest of the day). Now imagine that in the state of dizziness you throw a dart at a wall covered in every stock you could possibly buy. This book, summed up, says you have an equal chance to make money as someone who researched all those stocks and carefully selected one.

As you might imagine this is a hotly debated subject, and “A Multi-Fractal Walk” counters this theory, saying you can use a form of technical analysis to predict the performance of an investment.

First, if you do not know what a fractal is, it is reductionism, or breaking down the whole into individual parts. The smaller parts are then evaluated to determine what the whole is likely to do. If you ever watch CNBC you have seen them show the performance of an investment over a set time period. Sometimes this time period is a few hours, sometimes it is many years. Either way this is a fractal.

The multi in multi-fractal is in reference to forecasting. The analyst will take the fractal and “squish” it so that the final return is the same, but the gains/losses occur faster. The analyst will also expand the fractal, slowing down the speed of the gains/losses. This gives the analyst multiple versions of the same pattern believed to occur in the market, of which the analyst can use to make a projection.

The essay argues that Modern Portfolio Theory (using historical averages to project future investment growth does not account for extreme movements in the market, such as the 2008 crash, and therefore your projections are likely to be inaccurate.

The author concludes the essay with some applications of multi-fractal use, stating the best way to project future returns is to use the actual historical returns, rather than an average return. Essentially, he promoted running a Monte Carlo simulation.

My Takeaway

Samuel Clemons (AKA Mark Twain) said, “History does not repeat itself, but it does rhyme.”

The human brain naturally seeks patterns. We want order and structure in our lives and we often find patterns and create explanations with little to no real basis for such claims. There are essays, blog posts, and books that tackle this research topic. Even the author of this article starts with a quote on this subject, “The geometry that describes the shape of coastlines and the patterns of galaxies also elucidates how stock prices soar and plummet.” The bulk of this theory is based upon looking for patterns in the market which is a manmade thing, constantly changing as new investment theories and approaches are designed. "Fooled By Randomness" by Nassim Taleb is an excellent book that demonstrated why the market is not a collection of predictable patterns.

One item that this idea is correct is that Modern Portfolio Theory does not always do a good job of considering pro-longed and large ups and downs.

For example, lets pretend it is the beginning of 2018 and you are evaluating investing in the S&P 500. You decide to use the period of 1998 to 2017 to estimate a projected return. If you average the returns you will project an average return each year for 20 years of 8.83% leading you to estimate a final value of $54,356.55.

If you instead use the actual returns for each year you would project a final value of $40,301.56. This $14,054.99-dollar projection difference is close enough that a quick average is enough for general planning, but large enough that you should probably get more detailed in your projections.

This whole thing may sound complex, that is why a Accredited Financial Counselor and Investment Advisor are important. The professional can do the complex work and give you a simple process.

  • Kyle Grevengoed

The Emergency fund is always a hot topic because everyone wants one, but no one likes seeing the .01% interest rate earned in a basic savings account.

The important thing to remember is that your emergency fund is not there to earn interest. The second thing is that the amount you need in your emergency fund changes in different life stages. A single 20-something that does not own a home needs far less than a 30-something parent and homeowner. Your emergency fund also typically start going down as the kids get older, your investments increase, and your mortgage/debts get paid down and eventually paid off.

It is a good idea to sit down and determine how much you need once a year. If your fund as too much put some in investments and earn more! If it has too little get more into that fund ASAP. Conventional wisdom says you should have 3-6 months expenses in this fund. The actual amount will vary based on your situation.

While interest is not a priority in an emergency fund, there is an interesting way to earn a little bit more interest. This method also gives yourself a deterrent that will make you ask: Is this really an emergency? Do I really need this money NOW?

This method is called laddering CD's.

You take your emergency fund and divide by 5 and open 5 separate CD's at your local bank or credit union (generally credit unions will have higher rates). You will want to open these five CD's on the same day and open 1,2,3,4, and 5 year CD's. The representative will likely inform you of a special rate on the 18-month CD (or some other odd number). Avoid this and stick with exact year CD's so that all your CD's renew on the same day every year.

When your 1-year CD matures renew the CD and reinvest the interest into a 5 year CD and repeat with every CD as it matures. Eventually you will have five 5-year CD's, allowing you to earn the higher 5-year rate, and giving you access penalty-free to 20% of your emergency once a year. Want to add a caption to this image? Click the Settings icon.

With a CD you can withdraw the funds early with a penalty (which is usually the interest you earned capped at 1 year's interest). This is ideal because the small fee will make you think twice about whether you really should be spending the money, but also does not cause you to lose the original investment (confirm this with your financial institution).

The interest rate you will earn does not appear to be much but it is surprising just how much your emergency fund will earn over time. Go to the below link to calculate how the interest should accrue for you. Remember the primary goal is preserving your fund with a bonus of some interest, so do not compare the interest to the expected earnings in your retirement account!

Contact me if you have any questions about developing an emergency fund, whether to keep an emergency fund or pay down debt, or other questions in the simple, complicated world of finance.

  • Kyle Grevengoed

What is the most important line item in your budget if you are married? It would be easy to say that this is your housing, utilities, food, giving, or savings. While all of these are no doubt important line items in any budget, one particular item, often put on the back burner, or removed entirely, gets overlooked.

Date Night.

Yes, date night. Couples fall in love by going on dates, talking for long hours, or in some cases being together, without much talking, and loving every minute. During this time there is little talk about managing a life and a budget together. As the couple nears and enters engagement and gets married they must be careful not to eliminate the date night from their life, even when and if kids enter the picture.

I have had numerous couples at my desk with financial struggles of varied levels and one common theme emerges. The most serious the trouble the less they are still dating each other. There is a common debt payoff philosophy called the debt snowball. This is a highly effective technique in which you list your debts in a particular order and pay minimum payments on all debt with the debt at the top receiving any extra money you have in the month. As you payoff each debt the money going toward the now paid off loan goes toward the next loan on the list. To often important things get removed from the budget in order to accomplish the debt payoff plan and discretionary expenses such as date night are too often the first to go. Do not remove this item even when in a debt snowball payoff plan or a big savings push.

Phil Vassar sings a great line in his song, "Just Another Day in Paradise." The lines says,"I guess it's Dominoes Pizza in the candlelight." Even if your date night is a walk through the park with a picnic lunch, costing nothing, it is crucial to make this event important. If you stop doing with your spouse the very thing you did when you were falling in love, it will make it much more difficult to manage your life and budget together, especially if you are trying to meet a difficult savings or payoff goal. I have seen countless couples in financial struggle and fights in which each blames the other and spends more as a way of ensuring "fairness."

Two people will have disagreements about money, this is unavoidable. A regular date night in which you attempt to take a break from the stress and struggles of life and simply enjoy the company of the one you love most will make these disagreements easier to resolve. Date night will not make your problems go away and it may still take hard work and discipline to accomplish your goals. Keep striving for better or for worse and date your spouse.