The Ultimate Portfolio Guide for All Types of Investors

The Ultimate Portfolio Guide for All Types of Investors


What does the historically best portfolio with the ideal balance of risk and return look like?

Ask that same question to different people and you’re likely to get not only different answers but also completely different paths to get there.  Your investment-savvy sibling might look up the long-term average returns for a few assets or funds and pick the best one.  A financial adviser might steer you towards the most popular portfolios that attracted the most clients.  A mathematician might use averages, standard deviations, and covariances to calculate the very precise theoretical ideal percentage of a given set of assets.  And an economist might lecture on valuations and economic conditions and put you to sleep before you even get to the answer.

Different people have different perspectives, and that’s part of what makes investing such an interesting topic.  With the massive number of portfolio variations available, finding the unique needle for every investor in the haystack of potential options seems like an impossible task.  It’s no wonder that the answer differs so wildly based on who you ask.

So what approach might an engineer take?


 Forget the needle.  Let’s study the haystack.


After a lot of experimentation, I’ve worked out a way to calculate the long-term performance (since 1972) not just for the best possible portfolio, but for all possible portfolios.  More specifically, I’ve studied every possible combination of the 26 asset classes on this site in equally weighted portfolios of one to five assets.  That’s 83,681 different portfolios that cover pretty much every passive investing style one can imagine.  Who needs a magical formula for the perfect portfolio when you can view and sort them all?

Before we get to the results, let me briefly walk through a few assumptions.

First, the primary goal is not to optimize asset percentages to minuscule detail but to explore the power of diversification.  All portfolios are some combination of one to five equally weighted and regularly rebalanced unique assets reminiscent of the Ivy Portfolio, Bernstein Portfolio, or Permanent Portfolio.

Second, you’ll note that I break somewhat from convention on the metrics used as I insist on using terms that are valuable and actionable to an everyday investor.  So returns are measured by the inflation-adjusted compound annual growth rate based on actual historical sequence of returns, as that’s what counts in the long run.  And as a tangible proxy for risk I prefer the single worst year of portfolio returns.  No real person evaluates their own investing satisfaction based on standard deviations or Sharpe ratios.  The bottom line loss in your year-end statement is what most often drives people to change portfolios, so let’s dispense with the esoteric measures and keep it real.

Most importantly, I explicitly reject the assumption that there’s only one good solution. Reducing the result to a single overly-specific portfolio that inevitably changes every year and ignores the needs and preferences of the individual investor may be interesting in an academic sense but is not particularly useful.  But the cool thing about taking the haystack approach is that it doesn’t hide the many secondary solutions at all — it highlights them.


Looking at every portfolio at once, a few trends jump out.  First, just putting all of your money in a total stock market fund may be the simplest solution for many investors, but is actually one of the least efficient ways to invest from a risk mitigation perspective.  There are literally thousands of portfolios that posted similar or better returns with much lower drawdowns. Second, the relative thickness of the mass of points suggests that for any given max drawdown, there’s typically a 4% spread of possible returns.  Rather than immediately conceding that you should ramp up risk to improve returns, why not first explore how diversification can accomplish the same goal with less downside?

So let’s get down to business — what’s the best portfolio for you?

I have absolutely no idea. Maybe you need 7% a year to meet your investing needs and are willing and able to suffer some really bad years in the process, or maybe you only need a modest 3% and are more interested in a nice smooth ride.  Of course past performance is no promise of future returns, and you may have a personal distaste for gold, emerging markets, or certain bonds regardless of their backtesting performance.  Every person is different, and anyone who tries to sell you a one-size-fits-all portfolio is probably doing you a disservice.

So rather than offer you the answer, I chose to create a tool to help you discover it for yourself.  It’s called the Portfolio Finder.

Portfolio Finder Example

The Portfolio Finder is a simple interface to help you explore the entire collection of all possible portfolios.  All you do is enter the minimum required return that meets your needs, and the Portfolio Finder will locate the top ten portfolios with that return or greater that have the lowest worst historical drawdowns in any single year.  Practically speaking, it does this:


These are actual results from the calculator overlayed onto the previous chart.  When entering a desired return the same as the total stock market, the Portfolio Finder scans the cloud for the best solutions as far to the right as possible.

In addition, the Asset column is a little different than the other calculators.  Rather than type in a percentage of the asset you want, you simply type an X next to assets you don’t like (type anything else to remove the X).  Do you simply not care for small cap value, or prefer to ignore any bonds but a total bond market fund?  No problem — just exclude them.  The Portfolio Finder will automatically update your top-10 list to the next available portfolios that meet your needs.  It’s that easy.

Based on popular demand, I’ve also added the option to require an asset.  So if you already own a total stock market fund and only want to see portfolios that include it, type an R next to that asset (type anything else to remove the R).  Just remember that you can only require up to five assets.

Now I wouldn’t be doing my job very well if I didn’t reiterate that the Portfolio Finder is simply a tool for exploring past performance since 1972 — the most data I have available.  The same tool next year will have a different order of portfolios, and it in no way forecasts future returns.

What it is really good at, however, is helping you uncover what types of portfolios have done consistently well in all types of economic environments.  Consider the two options from the last chart — a total stock market fund with a max drawdown of 37%, or an assortment of options with the same or better returns but which remarkably never lost more than 10% over the last 44 years.  Which would you prefer?  While the top Portfolio Finder solution may not always be the best portfolio option looking forward and you may have very good reasons not to use it, there’s unquestionably something to be learned from the data about portfolio construction for risk management.  Apply that thinking to something you relate to, and your investment strategy will be stronger for the effort.

Of course not every investor wants to have an equal weight portfolio, and there’s a lot more to picking a portfolio than just looking at a single CAGR and the worst year.  I’ve had to limit the scope of the tool for practical computing reasons, but the site is full of calculators where you can take a portfolio you’re interested in and tweak or dissect it in a multitude of ways.  Once the Portfolio Finder gets you in the ballpark, feel free to take it from there.

While all backtesting has limits and the results should not be taken as gospel, I personally believe the Portfolio Finder can be a tremendously helpful tool for curious investors who want to explore diversification options but aren’t sure where to start.  Between the Portfolio Finder that takes an analytical approach to portfolio construction and the Portfolios section that documents the various recommendations of experts, my goal is to provide tools to attack the problem from a few different angles.

Hopefully you’ll find this latest one as interesting as I do.  Enjoy!


IMPORTANT UPDATE: Since this was first posted, the Portfolio Finder has been updated to account for multiple timeframes in its CAGR calculations.  Now it’s even better, and accounts for any potential start date sensitivity!  Please read this for more info.