Quantum Portfolio Management

Your Net-worth Is Fuzzy

Quantum Mechanics is spooky, but it’s real. It does things that are counter to common sense. For instance, a single bit of light, a photon, is both a wave and a particle. Quantum systems can exist in a state called “superposition.” Quantum computers are built using things called “qubits” that simultaneously zero and one while they are in this state. When you observe the qubit, it collapses into a zero or a one.

You’ve perhaps heard of Schroedinger’s Cat. It’s a thought-experiment that illustrates superposition. Put a cat in a box with a vial of poison gas with a hammer mechanism to break the vial when a radioactive particle decays. This quantum event cannot be deterministically predicted. If the particle does not decay, the cat lives, otherwise the cat dies. Until you open the box, the cat is both alive and dead. Welcome to quantum mechanics.

What does this have to do with money, investing, or one’s net worth?

Take the value of all your assets, subtract all liabilities, and you’ve made a difference! It’s your net worth. At your bank you can check your accounts to get your dollar balance. You may also have other accounts or other assets that have to be sold to get dollars: gold, crypto-currencies, and shares of stock.

One point I’ve tried to make is that when the stock market jumps up, or when it dives down, I still have the same number of shares of VTSAX as I had beforehand. The only difference of wild swings in share prices is how much to pay to get more, or how much to get when selling.

This is why it is not a good idea to obsessively check your share prices. I have a spreadsheet where I add up all my major accounts to track my net worth. I have to resist the temptation to update it too often. All the while I have been enjoying the huge run-up in the stock market this spreadsheet has been bothering me.

Those numbers aren’t all real.

I would have to sell my shares of VTSAX to actually get those dollars. If the price runs up or crashes down, it doesn’t mean anything until I sell. My net worth–like Schroedinger’s Cat–is in a state of superposition. It’s both purring happily despite the market meltdown and sadly moribund during a huge run-up. All at the same time.

My hard-earned savings reside in this fuzzy state of semi-existence until I open up the box and take a distribution from one of my accounts. At that point the magic quantum superposition collapses to whatever the share price is on that day.

It is folly to get in a position where you might be forced to sell. Any money in the market must be moey you won’t need for a few years. Think of the recent volatile swings of the Dow lately. If it melts down like it did in 2008, do you have other resources to buy these freshly discounted equities? If it jumps up some more, do you know what other productive assets to buy with premium-priced shares?

It’s all fuzzy and up in the air until you actually execute that buy or sell order.

Last night I ate a free meal at a nice restaurant. The occasion was a sales pitch from a guy selling annuities. He gave a great presentation. Annuities have interesting mathematical properties. Whereas my individual portfolio goes through distinct accumulative and distributive phases, the annuity’s collective portfolio is continually balancing both inflows and outflows of capital. This makes the math easier, it makes more profits, and it reduces the risk of running out of money.

It also pays the salesman’s commission. The money that paid for your free supper came from an earlier customer’s annuity purchase. Always buy an annuity from a company that will survive longer than you will. That means the commission from YOUR annuity purchase will be paying for some future customer’s free supper. Expensive hidden expenses, but you get certainty and assurances you can’t find in the quantum superposition mumbo-jumbo I started this post with.

I know for certain that an annuity contractually binds a corporation to pay me a fixed amount of money for my lifetime. Or that corporation’s lifetime should they go bankrupt. Any time someone promises you lifetime income in retirement, there’s an annuity lurking in the background. Even when it’s the Gubmint Ponzi Scheme Social Security Administration.

(No, Social Security isn’t a Ponzi Scheme. It’s a tax.)

The richest of the Founding Fathers (Benjamin Franklin) said nothing is certain except death and taxes. And that fits here. Social Security is certain: it’s a tax. Annuities certainly provide “lifetime income.” Understand that the lifetime of any annuity-offering company is not eternal. Someday soon a crypto-currency powered smart-contract will enable annuity products. That will be interesting.

At this point I feel I can manage the uncertainty of having a Quantum net worth that is plus or minus the markets’ volatility. My wife and I live frugally and keep cash reserves sufficient to go years without selling any VTSAX or real estate. The proof of whether this will work or not lies in how much catfood is in our future.

Steve Poling

Masters degrees in math and computer science. Poet in several computer languages. I write stories about Sherlock Holmes' brother Mycroft, steampunk, and SF.

Grand Rapids, Michigan http://www.catfoodretirement.com