The Portfolio Finder Just Got A Little Smarter

Update

Every time I post a new tool here I’m not always sure what to expect.  Some resonate with people immediately, and others take a little time to refine.  That said, the response I’ve received for the Portfolio Finder has exceeded my wildest expectations!  Thanks to everyone who has taken time to send me feedback.  Each comment, both positive and constructively critical, helps me to make the tools more helpful and easy to use.

A common theme on this site is that single averages lie, and I focus a lot on looking at the big picture to avoid the pitfall of cherry picking data.  So it comes as absolutely no surprise that the most common request I’ve received lately is to provide a variable start date for the Portfolio Finder.  After all, if you compare it to some of the other tools the returns data seems extremely limited.  For example, this chart shows all 990 possible inflation-adjusted CAGRs for the total US stock market since 1972.

PF-Update-1

See that lone outlined square to the far top right?  That’s the long-term CAGR since 1972 that is reported in the table and used in the Portfolio Finder.  While that’s a very good reference point that encompasses everything the markets have thrown at a portfolio since 1972, it does suffer a few drawbacks.  For example, many people rightly point out that starting the analysis in 1972 may unfairly benefit gold-heavy portfolios that skyrocketed after the repeal of Bretton Woods in 1971, a one-time event that may never happen again.  Likewise, it may unfairly hurt bond-heavy portfolios to start at the beginning of a full decade of soaring interest rates.  And some assets like international small had an awesome run in the past but have really struggled the last 25 years.  I could go on, but you get the idea — one data point really doesn’t tell the whole story.

This is a fair point, and the reason why I originally chose a single return rather than a more timeframe-neutral metric was purely technical.  Calculating even a single average for so many possible portfolios and condensing the results into a user-friendly format that was a reasonable file size for sharing was a massive task.  I chose to select the single best data point I could find to simplify the analysis and get it out there for feedback while I kept working behind the scenes.  In the meantime, I did my best to direct people to other tools (like the Heat Map above) to supplement the Portfolio Finder results.

After developing my data techniques for another month, I’m happy to announce a notable update for the Portfolio Finder that takes one more step in the right direction.  The reported returns are now start date independent!

Here’s the new methodology:

  • The calculator first finds every rolling 15-year real CAGR since 1972.  So it calculates the return from Jan 1st 1972- Dec 31st 1986, from 1973-1987, and so on.  The same portfolio has 30 different average returns to choose from.
  • It then searches all 30 possible returns for the single worst CAGR.  This is the one it reports in the Portfolio Finder.
  • Rinse and repeat 83,681 times for every possible portfolio and sort the results.

So let’s tackle the obvious questions:


 

Why did you choose 15-year periods?

Let’s look at another Heat Map for reference.  I’ve outlined the returns that the Portfolio Finder now uses.

Heat-Map-Rolling-Returns

15 years is long enough to bypass any short-term market volatility that would make any volatile portfolio look bad.  But it’s also short enough to get 30 periods to study that span the high inflation 70’s, the roaring 80’s and 90’s, and the tumultuous run starting in the early 2000’s.  The variety of economic environments is critical to the analysis.

Perhaps most importantly — despite the protests of the most stoic investors, 15 years is a really long time to wait to finally receive your expected average return.  If it hasn’t manifested by then, the vast majority of people will have already changed course.  So from a practical perspective rather than a theoretical one, it also makes pretty good sense.


 

Why report back the minimum return?  Why not the median or average?

By selecting the minimum return over that range, it’s virtually impossible for any asset to gain an unfair advantage.  Maybe gold was incredible starting in 1972, but the 90’s were a bloodbath.  Stocks may look fantastic starting in 1985, but the 2000’s were pretty brutal.  Averages of averages can still be quite deceptive depending on the data distribution, but single worst averages (like single worst years) cut through the uncertainty and get to the core of what’s truly sufficient to meet your needs.

Fundamentally, reporting the worst-case 15-year return also makes the mission of the Portfolio Finder even stronger.  The portfolios it recommends are no longer simply the lowest loss options that are easiest to stick with.  Now, the averages also account for achieving your desired return in the most consistent way possible.  Any portfolio that can meet your minimum return needs even in the worst times will exceed them in all others, and it has the added benefit of being particularly robust in all economic conditions.  For that reason, I’ve also changed the terminology slightly to point out that the results are in fact the most consistent portfolios — not only in single years, but also in the long run.


 

When you look at the total results as a whole, I find it really interesting how re-tooling this from a start-date-independent perspective completely levels the playing field.

All-Assets-SDI

If you’ve used the previous Portfolio Finder you’ll first notice how much flatter the cloud is than before.  The highest returns are significantly lower, while the low loss portfolios are generally less affected.  High volatility really does a number not just on single-year returns but also on reasonably long-term averages.  BTW, would you have guessed that the top-performing portfolios on a consistent basis are in the middle of the pack from a worst year perspective?  And note how many portfolios had negative 15-year returns at some point.  Be really honest with yourself — how willing are you to wait that out?  Perhaps higher risk portfolios will pay off in the very long run, but there are clearly options out there to reach your long-term goals with a more enjoyable path along the way.

One thing I’d like to reiterate is that even with the new update, the Portfolio Finder is not at all intended to be a one-stop decision maker for your personal portfolio.  Every tool has its strengths and weaknesses, and there are so many factors that go into why you should select a particular portfolio that there’s no way I can account for every possible question in a single tool.  Even if I could, it’s still in your best interests to look deeper.

So I highly recommend that once you find a portfolio you like you also run it through all of the other calculators to see how it looks.  Charts like Heat Map and Portfolio Growth are particularly good at visualizing not just 15-year periods, but all of them in one easy-to-understand image.  Others like the Withdrawal Rates calculator showcase portfolio performance in retirement.  Maybe you’ll learn something new and change your mind.  A well-educated decision beats easy answers every time!

Hopefully the new Portfolio Finder will open up your eyes to even more asset allocation possibilities.  By planning appropriately and seeking out the most consistent portfolios that meet your needs, you can avoid the typical negative investing psychology that makes so many people so frustrated about the markets.  My goal is to help you find an asset allocation you’ll be happy to hold for the long run.  If there’s anything I can provide to make that process easier, please don’t hesitate to contact me.  Your constructive feedback only makes the site stronger.

Happy portfolio hunting!