Interviewing contractors to work on your home is an interesting exercise in managing expectations.  Purchasing a product where you know exactly what you’re getting ahead of time is a lot different than purchasing a service where the end result can never be fully appreciated until the work is complete.  Who you choose to do the work thus becomes the most important step, but it’s also the trickiest to navigate.

The salesmen dress in their finest clothes and are on their absolute best behavior, and they all claim to have a glowing track record and seem to be very capable.  You know intuitively that not all companies can be above average and that some crews are measurably better than others, but looking at their finely curated portfolios of their absolute best work it’s sometimes hard to tell the truly talented craftsmen from the ones who only talk about their few successes.

Without the benefit of a crystal ball to see all the surprise issues they’ll have to navigate on your project and how they will react, the best one can generally do is study the history of the company and check their references.  By gauging how consistently they delivered what they promised and exceeded customer expectations over time, one can learn something about their character and gain enough confidence to hand over your hard-earned money to a company with a trustworthy reputation.

There’s a similar issue in investing, although the stakes are even higher.  

Every time I post a new tool here I’m not always sure what to expect.  Some resonate with people immediately, and others take a little time to refine.  That said, the response I’ve received for the Portfolio Finder has exceeded my wildest expectations!  Thanks to everyone who has taken time to send me feedback.  Each comment, both positive and constructively critical, helps me to make the tools more helpful and easy to use.

A common theme on this site is that single averages lie, and I focus a lot on looking at the big picture to avoid the pitfall of cherry picking data.  So it comes as absolutely no surprise that the most common request I’ve received lately is to provide a variable start date for the Portfolio Finder.  

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.

 

One of the most common sayings about the stock market is that it always “makes money in the long run.”  While based in truth, I find that line of thinking shortsighted because it suffers from one major assumption that too many people gloss over:

How exactly do you define “long run”?

When browsing portfolio options, investors rarely study them in isolation.  Whether it’s the S&P500, a second lazy portfolio, or their own current asset allocation, it’s natural to compare a prospective portfolio to a relevant benchmark.  In fact, one of the primary goals of Portfolio Charts is to collect as much information as possible about various strategies in one place to aid in the learning process.

Each of the charts and tools here can be used to study differences in portfolios, but it feels like there’s room for one to do that more directly.  I’ve been experimenting with a few ideas, and have come up with something that I think approaches the problem from a new angle without overlapping the other calculators too much.  I call it the Benchmark calculator.  As a nod to human nature and a reminder to those who use it, you can also think of it as an Envy chart.