When I was younger, I really enjoyed visiting my local used record store. There was always something cool about walking into a sea of thousands of amazing albums I had never heard before and looking for something new and enjoyable. Sometimes you’d hit it big and sometimes you’d run across something really weird, bit it was always a fun experience.
But strangely enough, I very rarely walked out with a purchased album. Sure there was more great music there than I would ever be able to listen to in my lifetime, but in a way it ended up causing more problems than it solved. You see, I’d have to take the time to listen to all of those albums in the store to know which ones were truly my taste, and frankly that was a lot of effort. So I’d usually ultimately go on a friend’s recommendation rather than truly explore for myself.
People used to wonder back then how a relatively expensive music download service would ever take off when there were cheaper local options like my used record store. But to me the most revolutionary new feature was not the “purchase” button, but the “search” box coupled with previews. With an entire catalog available at the click of a button, good music was easier than ever to discover. In my opinion breaking that barrier between the massive sea of music options and the ease of finding the right music for you was the key in driving the entire industry forward. It’s about connecting people to artists.
I’ve applied a lot of that experience to Portfolio Charts, and it’s probably why the single tool I’ve spent the most time on is the Portfolio Finder. If the Portfolios section is about showcasing the most popular albums, the Portfolio Finder is the app that lets you dig through the ocean of undiscovered talent for something truly original. It’s been an ongoing project, and today I’m happy to announce the next iteration that should make it easier than ever to discover a portfolio idea to meet your personal investing goals.
The core of the new Portfolio Finder is a completely rebuilt calculation engine that makes it about 100x more lightweight than before. Running calculations for every possible asset combination requires a lot of processing power, and that limited what I was able to do with the final data. But the fancy new method has freed me to focus on some interesting features, including the one thing most glaringly missing on a site called Portfolio Charts — a helpful chart!
Let’s start with the inputs, as the Assets table is a little different than before. Instead of studying every possible combination of assets including many you have no interest in, the new table asks you to select up to ten assets that you’d like to consider in a portfolio. To do that, you add a “C” next to that asset. You can also think of the C standing for “comfortable”, as those are the assets you’d be comfortable purchasing with your own money. Also, you can type an “R” to select up to five assets that are required to be in the portfolio. To remove an asset, simply type a dash or select it from the dropdown.
With the asset options selected, the Portfolio Finder goes to work. First, it figures out every possible equally-weighted combination of the assets you selected to consider (up to 637 for the full ten assets). These are all of the gray points on the chart. Next, it applies filters for the required assets. These are all of the green points on the chart. And finally, it searches these qualifying portfolios for the top-10 risk-adjusted options. These are the points in blue. These ten most consistent portfolios are then listed in the bottom table in order of returns.
At this point, you’re probably wondering what constitutes a top “risk-adjusted” return. The technical answer is that these are the top portfolios sorted by CAGR / Max DD, very similar to the Sharpe ratio. For the layperson, the most consistent portfolios are the ones to the farthest top-left of the chart.
Note that rather than cherry-picking a single start date that might be quite deceiving, all of the numbers are start-date-independent. Not only do the deepest and longest drawdowns look at the entire history as a whole, but the stated returns are also the worst rolling 15-year returns for each portfolio regardless of when you were lucky enough to start investing. So there’s absolutely no rosy advertising here nor any start date bias, as all portfolios are shown with no makeup and in their worst light. But think of it this way — if the shown portfolio met your financial returns needs even in the worst timeframe it exceeded it in all others, and these portfolios represent the most consistent options not only in terms of drawdowns but also in long-term returns. For more information on the metrics and methodology, be sure to read the FAQ.
With the new setup, I believe the Portfolio Finder is more powerful than ever in exploring new ideas that perhaps you’ve never considered. While the 10-asset limit may feel a little restrictive at first, tinker with the choices for a while and you’ll start to really appreciate the top scatter chart. To illustrate, let’s study a common question:
What single asset has been most effective at diversifying a US stock portfolio?
For the sake of argument, lets assume that all US stock assets are on the table. So I entered a “C” to consider all nine segmented size and value options.
As you can see, there are some pretty good returns in there but the deepest drawdowns are all pretty steep. If you’re not prepared to endure at least a 40% drawdown you really have no other choice but to look for other options to add to the portfolio.
So first, let’s look at total international stocks.
Note that I used an “R” to require total international. This forced them into every qualifying portfolio while using all of the considered options to fill in the gaps. The green dots represent every portfolio that includes total international, while the gray dots represent the rest of the portfolios that do not include it.
If anything, this simply knocked off a few of the top returning options with no real improvement in drawdowns. So let’s try bonds instead.
Now that’s a little more interesting. You can see in the scatter chart that the options started to move to the left without notably sacrificing returns. And scanning the bottom table you can start to appreciate the tradeoffs. Your natural instinct might be to jump at the top option on the list, but the fifth option — a simple 50/50 split of MCV and TBM — was within 0.3% a year but with a significantly less painful deepest drawdown. That’s a pretty nice alternative.
Finally, let’s try a volatile real asset like gold. How do you expect it to affect the results?
Surprised? Requiring gold in the portfolio had a terrific positive effect on drawdowns while improving overall returns for the cluster. And you can see from the top portfolios that there are lots of interesting options in the same risk and return ballpark.
Of course, that’s just the beginning and there are more than 83,000 possible portfolios based on your inputs. So if you dislike gold or believe strongly in international diversification, no problem. Try other assets and find something that does work for you. The point is not to drive you to any one portfolio — or even to suggest that every portfolio that comes up on the list is a good idea — but to open your mind to new options you hadn’t considered so that you can research them further and ultimately find one you’re personally comfortable with. Only you can make the best decision for your own life savings, but good decisions require good information and I hope you find the new tool helpful.
Finding new music isn’t so difficult anymore, and finding new portfolios doesn’t have to be either. Give the new Portfolio Finder a spin, and hopefully you’ll find a tune you’ll enjoy for a lifetime.
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