Unpack Financial Haystacks With The Updated Portfolio Finder

Advanced, Charts, Theory, Updates

Asset allocation is a obviously passion of mine, and I’m always excited when I find a new metric to tinker with.  These new ideas are not only interesting in their own right, but they also allow me to go back and refine some older tools to make them even better.  And it’s hard to think of a more appropriate place to start than one of my personal favorites — the Portfolio Finder.

For those unfamiliar with the Portfolio Finder, I think it helps to first reset the way you normally think about portfolio analysis.  Here’s the intro of my original post on the topic:



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.



Long story short, the Portfolio Finder is a fancy tool that calculates the risk and return of not just a single portfolio at a time but of thousands of possible portfolios simultaneously.  In addition, rather than looking at only a single reference date range it analyzes every possible timeframe we have data for including both the best and worst times to invest in each portfolio.  By studying every possible combination of a basket of selected assets over every possible investing period, the Portfolio Finder allows you to stop hunting and pecking for an individual portfolio and instead surf the entire cloud of options with no need to worry about cherry-picked data.  The tool has grown and changed quite a bit over time, and today I’m excited to release the latest update.




First, let’s recap the basics.

Unlike the other calculators on the site that require you to enter a specific asset allocation, the Portfolio Finder instead asks you to select up to ten assets that you wouldn’t mind owning.   Typing a C means that the calculator will “consider” it as an option, while typing an R will “require” that it be included.  It then jumps to work and calculates the risk and return of every possible combination of the selected assets, maps them all on the cloud chart at the top, and lists the top-10 risk-adjusted options in the table below.

Not sure what all of those asset codes mean?  No problem — there’s an entire section of the site dedicated to these assets and how to find individual index funds to fill each role.  And while the calculator is limited to 5 equally-weighted assets per portfolio in order to bound the problem just enough to be solvable without more serious computing power, that should be plenty to get you in the ballpark before you finesse things on your own with the other site tools.

I’d also like to point out two important inputs for investors outside of the US.  Not only can you change the country setting to study portfolios in Australia, Canada, Germany, and the UK, but do you also notice that little black box called “xUS”?  Switch that to “ALL”, and those three World funds switch to true global versions inclusive of the US market as well.

On top of that foundation, there are several new terms and features to note.


The measure of portfolio returns has changed

The old version reported the worst-case 15-year real CAGR, while the new version finds the 15th-percentile 15-year real CAGR.  Confused?  Don’t worry — it’s less complicated than it sounds.  It’s the same number you’ll find on the low end of the range in the Target Accuracy calculator, and it’s a nice conservative number that excludes a handful of the worst outliers.  I refer to this number as the Baseline Return, and I like it better than the old worst-case metric as it’s a little more forgiving and recognizes that a rare crash may have made a certain portfolio look less desirable than it really was.  As a result, you may notice that the cloud of results shifted up a little from before.


The measure of portfolio risk has changed

When investment gurus talk about risk, they usually default to standard deviation which is a measure of portfolio volatility.  I find that metric lacking for a variety of reasons, and previously used the deepest drawdown as a far more tangible measure of portfolio pain.  But now that I have calculations for the Ulcer Index handy, I like that measure even better as it accounts not only for deep drawdowns that may recover quickly but also for persistent shallow drawdowns that may take a long time to break even and are no less painful.  Larger numbers are proportionately more painful than smaller ones, and they’re very easy to compare side-by-side.  And if you’re wondering how the Ulcer Index absolute values relate to things like deepest and longest drawdown, take a few minutes to play with the Drawdowns calculator and it should quickly become apparent what works for you and what does not.


The top-10 portfolios are sorted by risk-adjusted score

Portfolios are ranked by dividing the Baseline Return by the Ulcer Index, and you’ll see the score on the left-hand portfolio column.  Experienced portfolio experts may be interested in the fact that the risk-adjusted score is very similar to the Sortino ratio conceptually, as both compare portfolio gains to downside risk.  But everyday investors can just think of these as the portfolios with the best returns bang for your downside buck that appear as blue dots on the top chart.


You can filter the results by performance

In an effort to make it a little easier to surf the cloud of options and find a portfolio that meets your needs, I’ve added the ability to set the minimum Baseline Return and the maximum Ulcer Index.  For example, here’s what it looks like when you take the same settings and set a minimum return of 5% and a maximum UI of 5.




Notice that not only does that filter the dots on the top portfolio cloud, but it also changes the top-10 list accordingly.  So whether you’re looking for the least pain for a certain baseline return or the largest return for a certain level of pain, the Portfolio Finder can help you meet your goals.

Pretty cool, right?

Now while playing with those new filters, please keep one thing in mind.  I would definitely caution against falling in love with any portfolio performance that looks too good to be true, especially if a data point is a clear outlier from other portfolios.  While I have gone to great lengths to account for good data, conservative metrics, and start-date-independent data points I’m still limited by the data I have available and past performance is certainly no guarantee of future returns.  So be smart about it and try to focus your attention on diverse portfolios likely to to do well in all types of economic conditions rather than betting your life savings that the one oddball portfolio with a few niche assets and outrageous returns isn’t just a temporary statistical anomaly.

I could go on for a while on the many nuances in the Portfolio Finder data, but with so many possible variations the best way to learn is to try it for yourself.  So give the new version a spin, try a few different asset options, and don’t be afraid to contact me if you have any questions or suggestions.  I’m always happy to help.

The right asset allocation for you is very likely hanging out in that haystack of portfolios, and even if it seemed elusive before with so many options it’s never been easier to find.  So don’t hold back — jump in and discover something new!