How the Red Queen Hypothesis Can Protect Your Wealth
By Jack HagedornJanuary 17, 2019
How the Red Queen Hypothesis Can Protect Your Wealth
The Disney classic Alice in Wonderland is more relevant today than ever before. When young Alice tumbles down the rabbit hole, she finds herself in a strange world that - strangely enough - reveals some truths about our own world today.
If you’ve seen the movie, you probably remember the Red Queen - the evil Queen of Hearts that turns Alice’s dream into a nightmare.
The Red Queen, responsible for many of Alice's troubles in Wonderland.
In one scene, the Red Queen traps Alice, forcing her to run in place without going anywhere. The theme of this scene has been used as a metaphor in several domains, including biology, sociology, and - yes - investing. It is called “The Red Queen Hypothesis.”
What is the Red Queen Hypothesis?
The Red Queen Hypothesis 1 comes from ecology (the study of ecosystems). Good ol’ Charles Darwin coined the phrase “survival of the fittest,” referring to adaptation and evolution in nature. Organisms that become the best adapted to their environment are the winners, he says.
Some researchers 2 wanted to perform an experiment: what would happen if organisms were allowed to grow in the perfect place? The researchers created a utopia for bacteria that had everything it needed to survive: food, light, and all the things bacteria need to reproduce without competing in their environment. The experimenters let the bacteria grow without any competition for 70 generations. Then something interesting happened.
When the team put the bacteria back into their environment to see how they would react, they all were destroyed by the competition - almost immediately. However, the environment had not changed, and the competing bacteria had not (outwardly) changed. The researchers then came up with their explanation: The Red Queen Hypothesis. According to Wikipedia, it states that organisms must constantly adapt, evolve, and proliferate, not to get an advantage, but simply to survive. In other words, the bacteria were eliminated because they had not adapted to their environment at the same pace as their competitors. This is a huge takeaway.
How does this relate to investing?
If you’re asking “what the hell do bacteria have to do with my money?” you’re not alone. The bacteria lost because they stopped adapting. In other words, by doing nothing, their strength dissipated.
What else erodes strength? Inflation.
Inflation eats away at the value of money, just like how the changing environment ate away at the bacteria’s ability to survive. The Red Queen Hypothesis of Investing is, therefore, in order to keep the value of your money consistent, you must (at least) match the rate of inflation. Otherwise, the value of your money is being destroyed.
The Red Queen Hypothesis of Investing is, therefore, in order to keep the value of your money consistent, you must (at least) match the rate of inflation. Otherwise, the value of your money is being destroyed.
In 2018, the rate of inflation was 2.1%. If the inflation rate stays the same, this means that in 20 years, $10,000 dollars will be worth $6,600.3 Without adapting to the environment of inflation, 34% of your money’s value would be lost. That is the same as working for 9 hours, but only being paid for 6.
What can I do to beat it?
There are several strategies to outpace inflation without taking on too much risk. To avoid ending up like the destroyed bacteria, higher-yielding money market funds, some preferred securities, and some fixed income products offer returns greater than the 2.1% of inflation without taking on the same amount of risk as equities.
Your custodian most likely offers a great purchased money market fund. Your financial advisor will also have some recommendations for preferred securities and fixed income products that can outpace inflation.
The most important takeaway here is this: don’t keep your money directly in cash because as long as inflation exists, it will inevitably lose value.
The Red Queen may have trapped Alice running in place, but sometimes running in place might be the best strategy to survive.
Be like Alice, and don’t lose to inflation.
Jack Hagedorn is the Director of Marketing at Chicago Partners.
1Zweig, Jason, Value Should Do Better. But When Is Anybody’s Guess, Wall Street Journal, April 27, 2018.
2JPM Guide the Markets, U.S., 2Q 2018, as of March 31, 2018, p 9.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
January 17, 2019
How the Red Queen Hypothesis Can Protect Your Wealth
The Disney classic Alice in Wonderland is more relevant today than ever before. When young Alice tumbles down the rabbit hole, she finds herself in a strange world that - strangely enough - reveals some truths about our own world today.
If you’ve seen the movie, you probably remember the Red Queen - the evil Queen of Hearts that turns Alice’s dream into a nightmare.
The Red Queen, responsible for many of Alice's troubles in Wonderland.
In one scene, the Red Queen traps Alice, forcing her to run in place without going anywhere. The theme of this scene has been used as a metaphor in several domains, including biology, sociology, and - yes - investing. It is called “The Red Queen Hypothesis.”
What is the Red Queen Hypothesis?
The Red Queen Hypothesis 1 comes from ecology (the study of ecosystems). Good ol’ Charles Darwin coined the phrase “survival of the fittest,” referring to adaptation and evolution in nature. Organisms that become the best adapted to their environment are the winners, he says.
Some researchers 2 wanted to perform an experiment: what would happen if organisms were allowed to grow in the perfect place? The researchers created a utopia for bacteria that had everything it needed to survive: food, light, and all the things bacteria need to reproduce without competing in their environment. The experimenters let the bacteria grow without any competition for 70 generations. Then something interesting happened.
When the team put the bacteria back into their environment to see how they would react, they all were destroyed by the competition - almost immediately. However, the environment had not changed, and the competing bacteria had not (outwardly) changed. The researchers then came up with their explanation: The Red Queen Hypothesis. According to Wikipedia, it states that organisms must constantly adapt, evolve, and proliferate, not to get an advantage, but simply to survive. In other words, the bacteria were eliminated because they had not adapted to their environment at the same pace as their competitors. This is a huge takeaway.
How does this relate to investing?
If you’re asking “what the hell do bacteria have to do with my money?” you’re not alone. The bacteria lost because they had stopped adapting. In other words, by doing nothing, their strength dissipated.
What else erodes strength? Inflation.
Inflation eats away at the value of money, just like how the changing environment ate away at the bacteria’s ability to survive. The Red Queen Hypothesis of Investing is, therefore, in order to keep the value of your money consistent, you must (at least) match the rate of inflation. Otherwise, the value of your money is being destroyed.
The Red Queen Hypothesis of Investing is, therefore, in order to keep the value of your money consistent, you must (at least) match the rate of inflation. Otherwise, the value of your money is being destroyed.
In 2018, the rate of inflation was 2.1%. If the inflation rate stays the same, this means that in 20 years, $10,000 dollars will be worth $6,600.3 Without adapting to the environment of inflation, 34% of your money’s value would be lost. That is the same as working for 9 hours, but only being paid for 6.
What can I do to beat it?
There are several strategies to outpace inflation without taking on too much risk. To avoid ending up like the destroyed bacteria, higher-yielding money market funds, some preferred securities, and some fixed income products offer returns greater than the 2.1% of inflation without taking on the same amount of risk as equities.
Your custodian most likely offers a great purchased money market fund. Your financial advisor will also have some recommendations for preferred securities and fixed income products that can outpace inflation.
The most important takeaway here is this: don’t keep your money directly in cash because as long as inflation exists, it will inevitably lose value.
The Red Queen may have trapped Alice running in place, but sometimes running in place might be the best strategy to survive.
Be like Alice, and don’t lose to inflation.
Jack Hagedorn is the Director of Marketing at Chicago Partners.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.