The universe is a big place. You can spend an entire lifetime staring at the skies, mapping every familiar constellation, and getting lost in the beautiful nebulas. But with enough persistence and the right tools you can still find new stars and galaxies that you never knew existed. Space is just that full of countless possibilities.
Choosing a portfolio can sometimes feel the same way. You can know all of the major celestial objects and may even have a favorite you call your own, but the millions of possible options are hard to ignore. So as you contemplate the skies at night thinking about the future you’d like to achieve as soon as possible, it’s natural to wonder what would happen if you just looked a little harder. One more asset. A slightly different percentage. If only you had the right telescope, a better solution might be out there waiting to be discovered.
I’ve spent a lot of time over the years studying portfolio options. But beyond just mapping the skies, I’ve always enjoyed putting my engineering background to good use to work on the tools as well. Today I’m excited to announce a major new upgrade to an old favorite.
I call it the Optimizer. And if you’re looking for new portfolio ideas to expand your investing horizons, you’ve come to the right place.
More Power
The Optimizer is built on the foundation of one of my favorite tools to date — the Portfolio Finder. I’ve always liked that chart for how it turns the analysis approach on its head and ignores the needle in favor of studying the entire portfolio haystack. By studying a huge number of possible portfolio options at a time, it’s a great way to start with a certain goal in mind and see what portfolio fits instead of the other way around.
That said, the Portfolio Finder had a few limitations that left room for improvement. The fixed risk and return metrics were carefully chosen to be helpful, but I always wanted more options. The interface was unique to that chart and was always a little clunky, and I often wished for the ability to map my own portfolio among the rest. And while the methodology of studying only equal-weight portfolios simplified the calculations quite a bit, the fact that it lacked the flexibility to look at unequal percentages left me wanting more. I was very proud of it, but sometimes your best work never truly feels finished.
Well, after a major calculation overhaul I was finally able to overcome some technical limitations and do some really cool things that I previously didn’t think were possible. User-customizable risk and return metrics? Check. Compare your own portfolio against all other options? No problem. Variable asset percentages? Done! Trying my early working prototypes was like peering through a fancy new telescope for the first time and seeing things you knew were there but just never had the opportunity to see until now.
So long story short, the Portfolio Finder update eventually became such an upgrade that I decided it needed a new name altogether. I call it the Optimizer because it’s much more than just a quick way to find a random allocation to explore. Plug in your own portfolio, and it will point you in new directions you may not have ever considered.
How It Works
When you open up the Optimizer, the primary asset allocation interface should look familiar.
The images in this article are all static, but the real thing is fully interactive.
Gone is the old system of selecting assets to consider or require, and instead you simply enter any portfolio you want to study just like all of the other charts. The defaults include a few more presets because the Optimizer shines with more assets to study, but other than that it’s the standard interface.
Here’s what the resulting chart looks like with those settings.
It may seem overwhelming at first, but here’s the rundown of what’s going on.
The display settings at the top control the risk and return metric used on the chart, and by default they’re set to the same Ulcer Index and baseline 15-year real CAGR used in the old Portfolio Finder. The chart first calculates those values for your specified portfolio and maps that point with the dark gray circle.
Each of the triangular points represent named portfolios found on the site like the Larry or Swensen portfolios. So if you only had the My Portfolio point and the triangular points, the resulting image would be very similar to the Risk and Return chart.
Where it gets really fancy, however, is all of the other dots.
Whenever you enter an asset allocation, the Optimizer looks at every asset you entered (up to the top 8 by percentage) and calculates every possible combination of those same assets in 20% intervals. Because repeats are allowed, one portfolio in this example has 80% large cap blend and 20% bills while another has 20% of all 5 assets. Run the same calculations for every combination, and the end result is the full cloud of alternative asset mixes to explore for combinations with lower risk or higher returns than the one you entered.
The orange diamond thus represents the best option in the bunch depending on your goal. The default setting is Most Efficient, which finds the portfolio as far to the top-left as possible. But other goals include Lowest Risk and Highest Return.
In this example, the most efficient portfolio option for these risk and return metrics happens to be the Golden Butterfly portfolio. But let’s also toggle off the named portfolios checkbox to look at the chosen assets alone.
Here you can see the magic of the Optimizer. By dumping international stocks and tilting the rest a little more towards small caps, it cut the Ulcer Index in half and raised the 15-year baseline by 1.7% a year. And it accomplished that by using assets you were already comfortable with, but simply in different proportions.
Seeing so many options in one place is pretty empowering, and exploring those other combinations can be educational no matter what goal you have. For example, watch how the optimized portfolio changes when you switch goals between Lowest Risk, Most Efficient, and Highest Returns.
And rather than settling for a single measure of risk and return, the Optimizer also allows you to select the metrics of your choice. On the risk side, you can study the ulcer index, standard deviation, or deepest drawdown. And for returns, you can map rolling investing timeframes of any length and measured using statistical cutoffs like the minimum, baseline, and median. Using the exact same assets, here’s what the chart looks like for 5-year rolling returns vs. deepest drawdown while rotating through the return cutoff options.
Pretty cool, right?
This type of analysis is what professionals often discuss in terms of something called the efficient frontier, which is a term for the boundary of portfolios at the top-left of the chart with the best risk and return tradeoffs. But the Optimizer takes it much further than most efficient frontier tools in terms of asset options, metric flexibility, and ability to explore every possible portfolio.
Premium Features for Members
UPDATE: The Optimizer was first released with these features reserved for members only. Today, they are available for all users for free! While the text remains here in its original form for posterity, Optimizer+ has been retired while all links point to the same Optimizer page with full functionality.
Speaking of exploring portfolios, the Optimizer is split into two versions. The base version is completely free and allows people to map all of the possibilities and find the top option for any goal. And there’s also a premium version called Optimizer+ reserved for members that makes it easy to fully explore the cloud.
While you’ll notice that the filter and rank settings are fixed on the main page, Optimizer+ opens those up for user inputs.
- The Lower Risk checkbox filters out any combinations with higher risk than your portfolio.
- Likewise, Higher Return filters out anything with a lower CAGR than your portfolio.
- The Required setting lets you select one asset from your portfolio that MUST be included in the optimized portfolio. Note that it even checks named portfolios for that asset, too.
- And probably most powerful one is the Rank setting. By changing the number, you can surf the cloud in order from the best portfolio to the worst for your specific goal.
To show how that all works together to identify a portfolio option, watch this simple progression from the full cloud to a specific target point.
That search flexibility is what makes the Optimizer+ truly special. Finding the right portfolio for you is about a lot more than just settling for the top option that may change based on the metric you’re looking at. But finding one that ranks pretty highly in the things that matter to you can really take the stress out of deciding on a portfolio.
With so many stars in the sky, the ability to focus is a game changer.
Working Examples
I’ve always found that the best way to try a new tool is to just dive in, but this one is complicated enough that I think it’s worth it to share a few use cases I think you’ll find interesting.
Experimenting with assets
If you prefer to simply explore possible asset combinations rather than compare against a single set portfolio, the method I like is to select mostly one asset used as a benchmark with 1% of up to 7 other assets to consider. For example, here’s what the entire tool looks like with 93% large cap blend and 1% each of other things you might be interested in. As long as there’s just 1% in the portfolio, the Optimizer will look for up to 100% of that asset in the results.
Simplifying a complex idea
While some people may find the 20% interval and the implied 5-asset maximum in the optimized portfolio restricting, I actually think it’s empowering. For those with complicated asset allocations who might be thrilled to receive the same performance with a much simpler portfolio, the Optimizer can help you there, too. All optimized portfolios (except for potentially the named versions) will always have no more than 5 assets, which is relatively simple to manage.
Also, the Optimizer+ has an extra trick up its sleeve. Do you see the text right below the Optimized Portfolio title? That shares the rank of your portfolio relative to the total number of qualifying portfolios. If you check the Lower Risk and Higher Return filters, then My Portfolio will always be last on the list. And by changing the rank to the next-to-last number, you can find the closest simplified version of your own portfolio.
As one example, check out this complex 9-asset portfolio. Then look at the nearest optimized alternative.
For these risk and return metrics, you could have achieved virtually the same outcomes using a simple 4-asset portfolio. To be clear, that’s not to say that this portfolio will always have the same performance as your own! But by studying alternatives like this, perhaps it will help you rethink which assets are driving performance and which ones are making things more complicated than they need to be.
Studying market sensitivity
One of the things that makes Portfolio Charts pretty unique in the investing blogosphere is its ability to study data in countries outside of the US. And the Optimizer is no different. With a dozen different countries to choose from, it can handle a lot of topics that other tools just aren’t equipped to consider.
For example, let’s say you wanted to look at the optimum combination of domestic and international stocks, domestic and international bonds, and domestic bills across multiple countries. Load those 5 assets into the Optimizer and switch the country setting, and the results are enlightening.
Even in three very different and far-flung countries like Canada, Italy, and Japan, the optimal stock allocation for these metrics was the same. And the bond allocation can perhaps offer insights into the types of bond markets that were most desirable for your particular goals.
Exploring new measures
Several years ago I wrote an article titled Three Secret Ingredients of the Most Efficient Portfolios that used this same type of tool to study the most efficient combinations of assets in portfolio construction. Following publication, the most frequent request was to see the same analysis using other risk and return measures.
That particular article took a lot of time to pull off even once, and while I may indeed revisit it in the future it’s hard to meet every request. But the fun thing about the Optimizer is that you can now run a similar analysis on your own and tinker to your heart’s content.
For example, load up the Optimizer with 8 of the most interesting assets, and you can make your own chart like this studying the median 15-year return rather than the baseline while identifying every combination that included some amount of gold.
With the Optimizer, things that took me weeks to accomplish just a few years ago can now be done in just a few seconds. So don’t wait on me! Jump right in and study the data for yourself.
Step Back, Look Up
As you can imagine, creating a tool like the Optimizer was no easy task. Even beyond the recent months of experiments and development, I’ve been iterating on the Portfolio Finder idea for years. This is just one more step in the process.
The reason I spend so much effort on big projects like this rather than simply fine-tuning charts for single portfolios is because I believe too many investors — amateur and professional alike — tend to think far too narrowly when it comes to portfolio design. I see people spending entire lifetimes staring into a microscope looking for new things to tweak within their tiny corner of understanding, torturing the same small number of assets to vanishing detail. When from my perspective, perhaps what they really need is a telescope to scan the skies.
The universe is a big place. Think bigger.
Of course, the Optimizer is not the end of the story. People warn about the dangers of pure data mining for a reason. I’ve put a lot of thought into the design like focusing on start-date-independent metrics less susceptible to the optimization whiplash commonly found in other efficient frontier discussions, but it’s still important to think for yourself. Just because a portfolio was the most efficient using certain risk and return metrics does not mean you should blindly trust it with your own money without careful consideration. The microscope does matter!
So think of the Optimizer not as the endpoint but as a mind-opening first step in portfolio research. Search widely with the telescope before focusing narrowly with the microscope, and the end result is far more likely to be on target. Once it gets you in the ballpark, all of the other charts can help you refine ideas to find something that truly meets your needs.
All analysis, curiosity, and innate desire to make stuff aside, that’s ultimately my goal. And I see the Optimizer as one more important tool in the arsenal to help people become comfortable with their investing choices.
To those of you who choose to contribute to that mission by signing up for a membership and taking advantage of the extra features in Optimizer+, thank you! And to everyone reading this looking for inspiration, fire up the Optimizer and I think you’re in for a fun experience.
Become an explorer, and the world becomes a lot more interesting.
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