Theory vs. Reality
The Sandbox Daily (7.8.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
theory vs. reality
Let’s dig in.
Blake
Markets in review
EQUITIES: Russell 2000 +0.66% | Nasdaq 100 +0.07% | S&P 500 -0.07% | Dow -0.37%
FIXED INCOME: Barclays Agg Bond -0.04% | High Yield -0.14% | 2yr UST 3.897% | 10yr UST 4.405%
COMMODITIES: Brent Crude +0.66% to $70.04/barrel. Gold -0.97% to $3,310.5/oz.
BITCOIN: +0.65% to $108,752
US DOLLAR INDEX: +0.01% to 97.482
CBOE TOTAL PUT/CALL RATIO: 0.92
VIX: -5.51% to 16.81
Quote of the day
“Time is the only currency you spend without knowing your balance. Use it wisely.”
- Gregory Bloomfield
Theory vs. Reality
Today I was reminded of an important quote from Morgan Housel’s book The Psychology of Money when discussing a framework for managing risk.
Specifically, the differences between theory and reality.
Theory is an explanation of how things are supposed to work.
Reality is how things actually work in the physical world.
“Studying history makes you feel like you understand something. But until you've lived through it and personally felt its consequences, you may not understand it enough...”
As you structure your portfolio, this is an important idea to keep in mind. In fact, it might be the most consequential element in the investing process.
You can look at historical charts to learn the frequency and depth of past market declines. Model different scenarios and twist the data until you’re blue in the face. Stare at hypothetical portfolio drawdown dollar and percentage amounts – doing your best to internalize them.
But, until you have lived through several declines yourself and watched your hard-earned dollars get cut in thirds or halves, you may not understand your true tolerance for risk.
Until that time, then, you might want to maintain an asset allocation that is a little less aggressive.
Because opening a finance textbook and reading of volatility and beta, value-at-risk, the Sharpe ratio, Sortino ratio, and hundreds of other conceptual matters are just quantitative tools. They don’t capture any of the human elements of investing.
Sure, much of investing is very mechanical in nature. Time horizon, asset allocation, portfolio costs, etc. But, do not dismiss for one second the squishy behavioral components.
The six black swans of this decade are a good place to start with level setting your own expectations.
Revisit how you felt, and of much greater significance, take an honest assessment of how you traded your account during:
COVID-19 shutdowns of 2020
bullwhip supply chain mess of 2021
inflation spike of 2022
fastest Fed rate hiking cycle in history during 2022 and 2023
tariff and trade war episode of Trump 2.0
Israel-Iran nuclear conflict of 2025
The perception gap is real. In fact, it looks a lot like this graphic below.
We all imagine a straight path in investing – rational decisions, steady gains, predictable responses. Black and white.
But the real world is messy. Emotions, surprises, and uncertainty tangle even the best-laid plans. Shades of gray.
The biggest threat to your financial plan isn’t the market. It’s abandoning the plan when it feels uncomfortable.
Sticking with a good plan beats chasing the perfect one.
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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