Most people know Ebenezer Scrooge as the cold-hearted, tight-fisted, “Bah, humbug!” guy from the Charles Dickens novel, A Christmas Carol. But was it really the “happiness of Christmas” that grated on Scrooge’s nerves, or was it something else that caused his foul disposition?

Indeed, it wasn’t a lack of status that made Scrooge grumpy. He was rich, owned his own financial firm, and lived in a mansion. So, what was it that made him such a contemptible character?

With apologies to Dickens, we believe we now know the answer.

Scrooge’s failure to regularly rebalance his investment portfolio turned him into a miserable wretch.


You see, Scrooge was a financial professional who understood diversification and asset allocation. But, unfortunately, he was also a penny-pinching tight-wad and understood how to protect his investments. Therefore, it makes sense that Scrooge’s failure to implement an essential risk management strategy – on his behalf – made him anxious and mean and almost certainly produced his ghost-filled nightmares.

But how could a financial professional ignore something so important?

Simple. Like many investors, Ebenezer fell victim to the pitfalls of emotional trading. When the market moved to extreme levels, Scrooge probably panicked, ignored his risk management strategies, and traded high and low to chase profits and avoid losses.

What he forgot, and that research would later illustrate is that investors who maintain their risk tolerance boundaries and don’t surrender to impulsive trading can improve their returns by as much as 5%.

Thankfully, someone in Scrooge’s office was looking out for him.

Bob Cratchet.

Bob was Scrooge’s right-hand man and was at the financial “counting house” day and night. Cratchet knew his stuff. He might have scoffed at the three ghosts in Ebenezer’s dreams, but he would never abandon the three steps to successful portfolio management.

First, Cratchet understood diversification as a risk management tool and would have ensured that Scrooge’s money was invested in various asset classes. While it wouldn’t guarantee his boss protection against loss, Cratchet knew that investing in financial instruments with little correlation to each other – each reacting differently to the same market event – was an essential component of minimizing risk and reaching long-term financial goals.

Second, knowing Scrooge’s tolerance for risk, he would have made sure that Ebenezer allocated the proper amount to each asset class; (Since the Brinson, Hood, and Beebower study in 1986, asset allocation has been recognized as the major determinant of risk and return for a given portfolio.) In Scrooge’s case, an allocation of 40% to stocks, 30% to bonds, and 30% to managed futures would have been likely, as Ebenezer was quite possibly a corn trader.

Finally, Bob knew that, over time, Scrooge’s investments would produce varying rates of return and that the target allocations for each asset class would eventually rise or fall (also called “portfolio drift”). So, for example, a bear market in equities might have left him with a 40% allocation to stocks, exposing him to more risk than he wanted.

Rather than let that happen (and listen to Scrooge rant and rave), Cratchet would have insisted that Ebenezer rebalance his portfolio, instructing him to buy and sell portions of each asset class, returning them to their original target allocations.

Would Scrooge have taken this advice if the market was still going up? Would he have sold rising assets to buy assets that were trending downward?

The truth is, probably not.

But as a good financial advisor and portfolio manager, Cratchet would have insisted that Ebenezer heed his advice. He would have made him lock up his gains and rebalance his portfolio so he’d be ready if and when the markets shifted in the opposite direction.

Scrooge may have been irritable, but he wasn’t stupid and would have listened to his trusted employee.

That’s why, on the following Christmas morning, Ebenezer was a changed and happy man.

He greeted people on the street with a smile. He gave Bob Cratchet a day off – with pay! And for the first time, he didn’t celebrate Christmas alone but spent it with the Cratchet family, including their son Tiny Tim.

Sitting around the Cratchet’s dining room table, it was easy to imagine Ebenezer and Bob excitedly discussing various rebalancing methods and the costs and taxes involved. And even though he wouldn’t have understood the intricacies of trading and capital gains costs, we can almost picture Tiny Tim listening to the adults and the laughter of everyone, exclaiming,

“Portfolio Rebalancing for EVERYONE!”

Photo by Joran Quinten on Unsplash