Getting a grip on reality from 'The Bachelor'

Being the father of twin teenage girls has opened up my life to things that I might never otherwise experience -- shopping for dresses, occasional spa nights, gales of late-night laughter and the television show "The Bachelor."

This is reality television, so it brings me back to my college days when I had 25 women desperately seeking my attention and hoping that I would take several of them at once on a quick trip to St. Lucia or spend a private afternoon picnicking in a vineyard. OK, so my "reality" was nothing at all like the one on television. But the show does contain practical applications for investing.

This star of "The Bachelor," Jake, has a fondness for women who are either blonde or who at least aspire to be. There are probably more reasons for this than meet the eye. He could simply be attracted to blondes; he could have created a narrative around how a blonde woman is different from a brunette or redhead; he is light-haired himself, so maybe he is a narcissist. Whatever the reasons, blondes dominate his choices.

The same is true of the investment business. There are some people who believe in the "Efficient Market Hypothesis," part of which subscribes to the theory that a stock movement is independent of its previous movement. Untrue. In their book "The (Mis)behavior of Markets -- A Fractal View of Market Turbulence," Benoit Mandelbrot and Richard L. Hudson show "price changes are not independent of each other.... many financial price series have a memory of sorts." If stocks did poorly one day, there is a higher likelihood that they will do poorly the next. We call this persistence. Just as Jake surrounds himself with a group of women with similar hair color, stock returns tend to cluster around turbulence.

That is why the market often stays down longer than you would have expected and has positive runs that seem to defy the news of the day. It is also why stock investing has more risk than is reasonably understood.

"The Bachelor" is in its 14th season. By my calculations, 350 women have sought to find undying love with the eligible single guy. If you add up the weight of all these women, and divide by 350, you will get the average weight of each contestant. Hypothetically, if you add a huge woman -- say 900 pounds -- to the group, she would increase the average weight of the group by less than 3 pounds.

If you add up the annual earnings of the contestants and divide by 350, you will get their average earnings. Now let's add Angelina Jolie's $27 million income to that group, and their average annual earnings will increase by more than $75,000 -- a few years' work for some of the "Bachelor" contestants.

This is because the extremes of investing, as Mandelbrot points out, are not "one[s] in which big changes are the results of many small ones, [but by] which major events loom disproportionately large."

Three years' worth of cash

There are several ways to handle this reality.

•When you know that you are going to be spending from your portfolio, you should be sure to have set aside three years' worth of cash needs. This will give you time for the market to recover if it goes through one of those wild periods.

If the market does well, continue to raise cash by selling some winning holdings. If the market does poorly, don't sell and allow your cash to fall. At some point in the three years, you should be in a position to raise cash again.

•Rebalance regularly. As Mandelbrot says, "The prime move in a financial market is not value or price, but price differences; not averaging, but arbitraging." Rebalancing has you take money out at highs and move it to other investments that are cheaper -- your personal arbitrage.

While Jake may surprise us with his final choice, it may not matter. "Bachelor" history has shown that none of the previous couples has stayed together. But just because they can't deal with the turbulence of a relationship doesn't mean that you can't handle a little turbulence with your investments.