The amount of data involved in building a comprehensive financial plan today can be overwhelming. As financial advisors, our job isn’t simply to gather information, it’s to make sense of it in a way that actually helps clients achieve their goals. The challenge we face is no longer access to information, it’s discernment. Knowing what truly matters and what is just noise. Technology promised clarity, but for many advisors it has delivered the opposite, more inputs, more alerts, and more complexity.
A major shift in my own career came when I realized that clients aren’t coming to me for more information. They’re coming to me for help filtering information. They want confidence, clarity, and focus in the middle of an overwhelming flow of data and opinions. That realization changed how I thought about my role as an advisor. This is also where Power Law principles provide a useful framework for cutting through complexity and restoring perspective.
A Power Law describes a relationship in which a small number of inputs account for a disproportionately large share of outcomes. It’s closely related to the Pareto Principle, the familiar “80/20 rule” but in practice, Power Laws are often even more extreme. We see this repeatedly in financial markets. For example, a small number of stocks generate the majority of long-term returns. The S&P 500 over the past few years is a clear example, where just seven stocks, the so-called “Magnificent Seven” have been responsible for more than half of the index’s total return.
The real question for advisors, however, isn’t whether Power Laws exist in markets, we know they do. The more important question is how Power Law thinking can be applied to an individual financial plan.
One of the most powerful examples is the value of helping clients stay invested during periods of market volatility. A small number of market days often account for a disproportionate share of long-term returns, and those days tend to occur during times of fear, uncertainty, and negative headlines. When clients get spooked and move to cash, even temporarily, they risk missing these critical periods. The long-term impact can be significant. JPMorgan’s research indicated that for investors in the S&P 500, simply missing the top ten days between July 1, 2005 and June 30, 2025 would have cut an investor’s return by more than 55%. Missing the top twenty days of the S&P 500 in the same period would have reduced the return by 73%.1
Another clear example of Power Laws within a retirement plan is the outsized impact of sequence-of-returns risk in the early years of retirement. Returns experienced at the beginning of the distribution phase matter far more than returns later on, because early losses are compounded by ongoing withdrawals and have less time to recover. A relatively short period of poor returns can disproportionately damage the sustainability of a retirement plan, even if longterm average returns look reasonable. This is a Power Law in action – a small number of early outcomes can drive the majority of a plan’s success or failure. Thoughtful planning around asset allocation, withdrawal strategies, and risk management during this critical window can have a greater impact than many other decisions made over the full retirement horizon.
In the end, I would argue the most effective investment strategies are those that recognize how outcomes are actually distributed, rather than assuming every decision carries equal weight. Power Laws remind us that a small number of moments, behaviors, and risks drive the majority of long-term results.
The Portfolio Waterfall investment strategy is designed with this reality in mind. By structuring assets around time horizons, income needs, and risk exposure, the Portfolio Waterfall helps clients stay invested through volatility, mitigates the impact of adverse early retirement returns, and reduces the likelihood of emotionally driven decisions. For advisors, it provides a practical framework to focus on the decisions that matter most, rather than reacting to endless data points. In doing so, the Portfolio Waterfall doesn’t just simplify portfolios, it helps advisors systematically address the most powerful forces shaping client outcomes and turn Power Law awareness into real-world results.
1. J.P. Morgan Guide to Retirement, https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/guide-to-retirement/, Accessed 12-12-25.
If you would like to know how to implement the Portfolio Waterfall investment strategies into your practice, please contact me using the information below.
(402) 249-5747
www.gestaltfinancialgroup.com
Josh@gestaltfinancialgroup.com
