The Ulcer Index Is A Helpful Way To Quantify Portfolio Pain

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As we all recover from a happy Halloween full of way too much candy and possibly a bit too much to drink, I imagine that many of you may not feel so great.  Indulgence has its downsides, and once the excitement of the sugar high wears off sometimes all you’re left with is an upset stomach.  Whether that discomfort is really bad but you recover quickly or is relatively minor but persists for a long time doesn’t really matter, as both situations are equally undesirable.

There’s a similar problem with investing, and scores of articles have been written on risk tolerance, sleeping well at night, and all sorts of downside mitigation strategies to help reduce that pain in your stomach that you just can’t shake when markets aren’t going your way and your life savings are struggling to stay afloat.  I’ve written before about how smart asset allocation can help solve the problem, and I’ve just added a really cool metric to take that analysis one step further.  It’s appropriately called called the Ulcer Index, and understanding how it works can help you find just the right portfolio for your personal pain tolerance.

Browse Each Portfolio In A Whole New Light

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I’ve always had a particular love for stained glass.  Not only are the colors incredibly vibrant, but the medium is also truly dynamic and the lighting can transform the same window throughout the day.  One moment it’s dark and rich, and the next it’s bright and lively.  With light activating glass and glass transforming light, stained glass is a special symbiosis of art and nature that allows you to look at the same objects totally differently.

In the investment world, the portfolios are the glass and the data is the light.  Too often people study portfolios through a single fixed spotlight of US-centric data, but that does the observant investor quite the disservice.  Certain investing biases become unfairly engraved as immutable truths based simply on the favorable lighting, while alternative ideas that may actually be much more attractive outside of the gallery setting get lost in the shuffle.  But study the same portfolios through the lens of an investor who does not live in the United States, and things get a lot more interesting.  The glass lights up in a different way, and new features rise to the top.

The Ideal Index Portfolio And The Many Paths To Perfection

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I went shoe shopping today for the first time in a while, and I forgot just how frustrating it can be.  Finding a nice pair of shoes seems like it should be a pretty simple task these days, but the number of options makes it much more difficult than you’d think! It’s kinda surreal to walk through aisles and aisles of shoes and immediately dislike about 90% of them for one reason or another, and even the ones you like may not be that comfortable once you try them on.  Buying shoes can be a real pain.

Well if you think about it, finding a good portfolio is a similar experience — there are lots of good options but very few easy answers.  I do my best to curate some of the best options to avoid the cheap knockoffs likely to wear a hole in the sole on the first walk, but just like there’s no one pair of shoes for every person there’a also no single best portfolio for every investor.  So you’ve gotta try them on for yourself.

How Time Perception Influences Investing Decisions

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Most people intuitively understand that time is a critical component of investing.  Whether it’s the time it takes to work and save a portion of every paycheck or the miracle of compound interest that gets better and better as you go, the importance of time is a central part of any detailed investing discussion.  But the human brain is sometimes ill-equipped to comprehend things that are far away, and that can lead to some mental over-simplifications that obscure the reality of future uncertainty.  For example, let’s talk a bit about a question I see come up pretty often:

 

Do stocks get less risky the longer you invest?

 

Your Home Country Is Inseparable From Your Withdrawal Rate

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Perhaps because of the proliferation of personal finance websites focusing on early retirement, I’ve noticed a lot of talk lately about safe withdrawal rates.  I think this is absolutely terrific, as financial independence is one of the single most empowering life goals one can pursue!  But greater exposure also has its downsides, as core assumptions such as the portfolio options, withdrawal method, and retirement length don’t always scale the way you might think and misconceptions can quickly propagate.

Withdrawal rates are an intellectual passion of mine, and I’m always looking for opportunities to contribute to the conversation.  And with the recent boon in global portfolio data, I’m finally able to address one of the biggest questions that I’m starting to see more frequently these days.

 

Does the 4% rule apply outside of the United States?

Understanding Cash Will Make You A Better And Happier Investor

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Investors have a real knack for over-thinking things.  There are those who imagine themselves as master traders controlling hundreds of variables at once like rocket scientists or professional sound mixers and squeezing out every last decimal of performance.  And of course there are inexperienced types who also imagine investing works like that but who lack the confidence to even start learning.  Personally I believe this complexity myth is disruptive to the well-being of both sets of people, and nowhere do I see this more than in the simplest of investing topics — cash.

Portfolio Charts Is Going Global

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I remember my mom used to say that she knew that my brother was up to something not when he was loud, but when he was silent.  I guess somewhere along the line I must have picked up that family characteristic, as my recent bout of less-frequent posting has been masking a crazy amount of activity behind the scenes.

Ever since I first launched Portfolio Charts I’ve been critically aware of the distinctive United States focus of the site and, to be honest, of most investing discussions in general.   The single most common request I’ve received is to add tools for investors around the world, and considering the glaring hole in international investing data out there I totally understand the desire.  But that absence of data is both an opportunity and a roadblock, and making good on my goal to be more than just a US resource has been a daunting task.

Well I’m pretty persistent when I set my mind to something, and I’ve been completely immersed in this project for the last few months.  New data sources, entire new fund models, portfolio updates, asset juggling, calculator modifications — it seems that every time I thought I had it all figured out I found a new project that opened up.  Today I’m happy to announce that the long hours have finally paid off, and I’m really excited to share the results.

Bring out your loonies and shake your pounds — Portfolio Charts is going global!

How To Predict Withdrawal Rates Without A Crystal Ball

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I’m always on the lookout for ways to improve the tools on Portfolio Charts, and Siamond really came through with his latest update to the Simba spreadsheet.  Buried in the heaps of interesting returns data is something really cool — direct calculations for safe and perpetual spending rates for a given investing period.  Based on an equation from a Morningstar white paper, they are particularly elegant compared to my old method and allow me to significantly improve the speed and stability of the Withdrawal Rates calculator.  And by doing so they open up a great deal of additional data that was previously too laborious to manage.

Well I’m a sucker for new data, and in the process of updating the calculator mechanics behind the scenes I took the opportunity to revisit an old question I’ve been wrestling with for a while.

 

How do you calculate a 40-year withdrawal rate when the worst start date for a particular portfolio was less than 40 years ago?

 

A Picture Is Worth A Thousand Calculations

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Perhaps you’ve noticed the tag line for Portfolio Charts:

 

a picture is worth a thousand calculations

 

While obviously a play on words to a common phrase that figuratively captures the descriptive power of images, some may not be aware that in the context of the site it is actually quite literal.  Lots and lots of calculations go into every image, and I thought it might be fun to illustrate just how deep the rabbit hole goes.  

The 7Twelve Portfolio And The Power Of Broad Diversification

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I once knew a guy who was really into woodworking.  One of the more fascinating things about him was that he not only made his own furniture but also was quite proud of his collection of hand-made woodworking tools.  I once asked him why he preferred those tools to mass-produced alternatives.  Among several reasons, “They do what I want”.

Some casual investors may wonder why I spend so much time investigating things like modeling mid caps and figuring out how to measure the error of older international bond data in backtesting calculations.  While I certainly find this kind of information intellectually interesting, I admit that it sometimes becomes a chore and I can see why most people steer clear.  The upside to all the groundwork, however, is that it expands my collection of tools and allows me to do what I want — explore interesting portfolios previously off limits simply due to lack of data.

Like, for example, the 7Twelve Portfolio.