When choosing a guide to carry supplies for a winding journey ahead, it’s worth taking a moment to evaluate the right person for the job. Their relative rank over time is usually not so simple. The strongest option might be painfully slow in the flat roads, while the fastest man on earth might falter at the first sign of mountain steps.
When the road is a mystery and you have no idea what obstacles may lie ahead, the challenge multiplies. At some point you have to stop optimizing for strength or speed and start thinking about well-rounded consistency. A guide who can handle any conditions pretty well can easily beat out a team of specialists.
Even if you’re not the outdoor adventuring type, investors face this challenge all the time. Your chosen asset allocation is your guide who carries your life savings on your financial journey, and you have no idea where the future road may lead. Finding a balanced portfolio with a consistent track record can make the process a lot easier, as you can rest easy knowing you’re in good hands no matter what happens.
To help with that evaluation process, I’ve just launched a brand new chart designed to compare the relative returns of many different portfolios at any time in history. Think of it as browsing the performance of dozens of guides at once under any conditions you choose. I call it the Rank Over Time chart, and it’s a great way to find your financial partner for the unknown road ahead.
Background
The Rank Over Time chart is inspired by great feedback on my recent Returns Quilt release from several readers who asked the same basic question in a few different ways:
I like how the Returns Quilt shows the annual performance of so many portfolios, but I’m more interested in comparing the compound growth over time. Is there any way to study that?
The vast majority of the charts do focus on compound returns, but most only handle one portfolio at a time. And a few like the Portfolio Matrix and Returns Quilt allow you study many portfolios at once, but they trade off a bit of flexibility in the process. That sounds like a good opportunity for something new, so I tinkered around, mashed up a few particularly useful chart features, and came up with the Rank Over Time chart to attack the problem.
How the Rank Over Time chart works
Because of the amount of data involved, the Rank Over Time chart is a little more information-dense than some of the other options. You actually get three charts in one.
Let’s start at the top.
The line chart works similarly to the Portfolio Growth chart that tracks the compound inflation-adjusted growth over time. But instead of looking at every start year of one portfolio, it tracks every portfolio from the start year that you specify. In this example, every line follows the performance of a different portfolio beginning in 1970 and displays every option over the next 15 years.
See the vertical gray line? That marks the investing timeframe that you’re able to choose for closer study. In this case it’s 10 years, which leads us to the second feature of the chart — the ranked list on the bottom left. Note how the colors of each line match the colors of each portfolio on the list. The line thus samples the portfolios in that year, and the list ranks them from best to worst.
Finally, look to the horizontal lines to the right. The gray boxes display the real CAGR of each portfolio with the specified start date and timeframe, and by looking at them it’s easy to see how they determined the rank. But the chart actually goes way deeper than that.
I always like to look at the big picture rather than just cherry-picking individual historical periods to make a portfolio look good or bad. So for each portfolio, the tool looks at every rolling return of the specified duration in the full database since 1970. The horizontal line represents the entire spectrum between the best and worst rolling timeframes, which helps to visualize the gray boxes in the full historical context.
For another example, here’s the same chart looking at the 15-year performance of UK portfolios starting in 2000.
Clearly that was a rough timeframe for UK stocks, as the Total Stock Market portfolio experienced its worst 15-year performance on record. But other portfolios performed quite well, including some like the Coffeehouse Portfolio and Pinwheel Portfolio where the returns were quite ordinary by their standards.
And of course, like all of the other charts you can also display your own custom portfolio on the list. My Portfolio in this example uses the default US 60/40 stocks/bonds settings, but you can change the composition to anything you like.
What you can learn
The Rank Over Time chart is one of the more powerful tools I’ve made so far because of its ability to study tons of data for many different portfolios all in one place. From comparing lots of growth paths to compiling every rolling return, there’s a lot going on. So if you want to understand where it should fit in your portfolio-studying toolkit, here’s what I recommend as a starting point.
First, take some time to play with the start year settings. The chart is best used not simply by depending on the default, but by changing the date to see how portfolio performance changed in different economic environments. The 1970’s were very different from the 1990’s! And tools like this help to see those differences for yourself.
Next, take some time to really let the horizontal lines sink in. Think about how some portfolios are truly more consistent than others with a much tighter range of outcomes. When looking at your chosen start year, note where it lies on the spectrum. How does your choice of year affect your conclusions, and how might they change if you look at a different economic era? And when evaluating portfolios lower on the list, pay attention to the actual return. Just because they ranked low compared to other options does not necessarily mean they performed poorly.
Personally, I’ve found that the Rank Over Time tool is most educational when iterating on those two thought processes. Pick a start year. Select a timeframe to sample something on the growth chart that looks interesting. Dive into the ranked list to see the detailed performance. And then look for another start year or timeframe that might affect how you think about each portfolio.
Rinse and repeat that process several times, and you’ll begin to truly appreciate the complexity of portfolio histories. Some people like to quote single long-term numbers or perhaps results from just one start date, but that obviously doesn’t tell the whole story.
When your portfolio is designed to sprint, look for how it does in the mountains. And when it’s a workhorse designed to survive the worst situations, look for how it keeps up on smooth roads. Just like picking your guide for a hiking adventure, the right data can help you find the right asset allocation for the road ahead. You may not know what’s coming, but by understanding how each portfolio handled different challenges you can feel much more confident in their ability to stay the course no matter what happens.
The Rank Over Time chart is thus my contribution to help you find the trusted partner you need. I hope you find it useful! And no matter what portfolio you ultimately choose, I hope you have a fun and prosperous journey.
/// Try the Rank Over Time chart ///
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