Rather than simply calculating the performance of a single asset allocation, the Optimizer searches every possible combination of the same portfolio assets and identifies the lowest risk, highest return, and most efficient alternatives. Use this to evaluate portfolio tweaks and explore effective new ways to achieve your investing goals.
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Overview
When evaluating a portfolio idea, it’s normal to wonder whether the percentages you’ve chosen are truly best for the job. To solve that problem, the Optimizer looks at each asset in a portfolio and not only studies the risk and return for that one allocation but also every other possible combination of the same assets. By visualizing the full landscape of alternatives as a point cloud, it’s much easier to see the big picture.
When you enter your asset allocation, the Optimizer first calculates the risk and return for your specific portfolio and plots it on the chart. Next, it looks at the top 10 assets in your portfolio (ranked by percentage) and calculates the risk and return for every possible combination of those assets in 10% intervals. Every portfolio combination gets it own dot. The end result is a cloud of up to 10,000 unique portfolios for study. You can click on any dot to see its composition.
When browsing the results, pay particular attention to the edge of the cloud to the top-left. That’s what professionals call the efficient frontier of options with the best risk/return tradeoffs.
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Calculations
Beyond the asset allocation percentages, the Optimizer offers a variety of settings to study portfolios from different angles.
Risk
Standard Deviation: The statistical uncertainty of the average real return.
Ulcer Index: A composite measure of drawdown depth, length, and frequency.
Deepest Drawdown: The deepest compound loss using year-end data.
All risk metrics are measured using the full database from 1970 to present.
Return
Average Return: The average annual real return since 1970.
Long Term Withdrawal Rate (LTWR): The very long-term withdrawal rate limit that both the SWR and PWR approach over time.
Real CAGR: The Optimizer calculates the inflation-adjusted compound annual growth rate (real CAGR) for every rolling period of your desired length since 1970. The full collection of rolling returns are then run through a percentile filter to identify the measure you want to study.
- Minimum: The worst-case outcome on record.
- Baseline (15th percentile): A conservative measure excluding the worst outliers.
- Median (50th percentile): The typical historical outcome.
- Stretch (85th percentile): An optimistic measure excluding the best outliers.
- Maximum: The best-case outcome on record.
Goals
The Optimizer offers 3 different search goals when scanning the cloud of options.
Lowest Risk: The portfolio with the lowest risk.
Highest Return: The portfolio with the highest return using your chosen CAGR metric.
Most Efficient: The portfolio with the best risk-adjusted return. This is calculated by first finding a theoretical point with the maximum return and zero risk, and then measuring the distance from every point on the chart to that ideal. The portfolios are then ranked by distance, with the nearest portfolio ranked #1.
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