Kicking Off The New Year With All New Calculators


The New Year is officially underway.  The holiday hangover is starting to wear off, resolutions have been made (and already broken), and bowl games are wrapping up.  But most importantly, new 2016 data is available!  I have actually been feverishly working for over a month now to prepare, and am proud to announce some exciting new updates to each and every calculator:


More Years

We now have 2016 data for every asset.  In addition, data has been extended back another two years and now starts in 1970.  So we now have a full 47 years of market data to study that covers all kinds of economic conditions.


More Assets

There are more bond options!  Based on popular request, I have added investment grade corporate, high yield corporate, and international bonds.   You can definitely expect to see a few new portfolios including these assets in the near future.


More Clarity

I’ve organized the asset allocation column in the calculators to better communicate how the individual indices relate to one another, and now you can see which assets are actually subsets of others.  In addition, I’ve made a handful of improvements to a few calculators to make them easier to use overall.


More Trust

The quality of the source data is greatly improved, with new sources that better model the desired indices.  The calculators also now include a nifty new system of verifying older data to ensure that the numbers are as accurate as possible, and they clearly communicate when data is trustworthy and when it is only estimated.


Quantity of data is certainly fun, but when it comes to trust it’s all about quality.  So let’s start there.

The data that powers the site is pulled from all around the web, and the Simba team on the Bogleheads forum has been spending a great amount of time and effort lately reviewing the original data sources for quality.  In some cases we identified alternative indices that model the desired one better than before, and in others we found that the original sources were, to put it kindly, highly questionable.  In a few extreme cases, we were even forced to eliminate many years of data because there are no good sources available.

Eliminating data, however, is tough pill to swallow for a guy who likes to study the historical performance of portfolios.  But that raised an interesting question — does a few years of missing data for an asset or two really hugely change the final results?  To explore this, I’ve been experimenting with ways to model portfolios with missing data and measure the resulting error.  It turns out that in some cases it does make a noticeable difference, but depending on the portfolio it does not necessarily have a major impact.  What happens when you build that error checking logic directly into the calculators?  You get some powerful and flexible new tools!

A really cool byproduct of this system is that it allows me to add more assets that were previously excluded simply because there was less available data.  So investment grade corporate, high yield corporate, and international bonds are all in, as I can use a total bond market index as a reasonable stand-in when needed and calculate the point when that assumption no longer holds up for a specific asset allocation.  And I also extended the verification system to any data point in the Simba spreadsheet not directly from an index fund or provider, so now you can feel confident that the data you see accurately follows your desired real-world portfolio regardless of original source.

You can read about how the error checking works in the updated calculator methodology, but the end result is that you can now study any portfolio you like back to 1970 and the calculators will clearly communicate when numbers are verified to be dependable and when they are only estimated based on the best available alternative data.  For example, here’s what the new Heat Map looks like:


In this case, the squares with the dark outlines are verified and the ones with no outlines are estimated.  Early small cap value data was derived from my own Fama French calculations, and the verification system determined that 30% SCV introduced too much potential error prior to 1976 (smaller percentages are not such a big deal).  The estimated numbers are still very valuable for providing investing context, as ignoring the early 70’s just because you’re short a bit of good SCV data isn’t particularly wise and can lead to decisions influenced by start date bias.  But understanding the dependability of the underlying calculations is also an important data point in any discussion and will keep you from leaning too heavily on precise CAGR numbers that maybe aren’t set in stone.

Unfortunately, you may notice that the one unavoidable casualty in all of this is TIPS.  Some very smart Bogleheads did a lot of research, and not only is the study that the old numbers depended on simply not reliable, but there also isn’t enough good data to even attempt to accurately backfill the numbers.  I hope to eventually reintroduce TIPS, but not before I can do it in a way that I’ll be willing to vouch for the results.  Good decisions require good data, and I’m committed to supporting both.

Of course the lack of TIPS will affect a few model portfolios, and I’ll be addressing that very shortly as I update the rest of the site.  It will take a little time to get the Portfolios and Assets sections up to speed, but in the meantime take the all-new Calculators for a spin!  All of the additional data should open up many new avenues of exploration.

Overall, I feel like the calculator updates are a huge step forward in data quality, diversity, and transparency.  It has required a ton of effort and I hope you find the results as useful and interesting as I do.  If you have any questions or spot an inevitable bug that I missed in the update process, please don’t hesitate to contact me.

Happy New Year, and happy portfolio hunting!


The Top Portfolio Charts Posts Of 2016


The magical week between Christmas and New Year’s Day is a common time of relaxation and reflection.  It’s maybe a little more frantic on my end as I prepare for year-end market returns and some exciting accompanying updates I have in the works, but it’s always helpful to pause and take a moment to review the year that was.

An annual tradition in our home is to watch the many “year in review” recaps that fill the television airwaves this time of year.  Remembering the inspiring personalities who passed away can be a little sad, while recapping the top viral videos of the year is always good for a laugh.  I think the thing I enjoy about these shows the most is simply how they keep you connected with the world around you even while time flies by.

So following that same mindset, I reviewed the site stats for the past year and took note of the top five most popular new posts by views per day.  Some of the results were expected, but a few were quite a surprise!  This type of information is really helpful for me to learn what types of new content I can focus on to reach the most people, and I figure knowing what other people are reading might be helpful to you as well.

So without further ado, here are the top five most popular Portfolio Charts posts of 2016:


5. The Ultimate Portfolio Guide For All Types Of Investors

Perhaps my most unique new tool of the year, the Portfolio Finder explores every possible combination of assets over every available timeframe and helps you navigate the cloud to identify the most consistent options that met your personal needs.  This post first introduced the concept, and if you find it interesting be sure to also read the two subsequent updates.


4. The Theory Behind The Golden Butterfly

One of the more interesting portfolios on the site is a personal creation, and this explains the reasoning behind it in detail.  Even if the Golden Butterfly is not the portfolio for you, the thought process and supporting data may offer you a valuable new perspective on your own asset allocation and the important tradeoffs involved with any investing decision.


3. Thinking Beyond Stocks Can Fortify Your Accumulation Plan

As this is my personal favorite post of the year, I’m excited that it made the list.  Have you ever wondered what the point of asset allocation really is while accumulating money, and whether just putting all of your savings in the single highest earning stock fund is the obvious choice for someone with many years to retirement?  This is my effort to make the case for the benefits of wide diversification at all points in life.


2. An Illustrated Guide To Retirement Spending Strategies

Retirement planning is something extremely important to so many of us, but there are surprisingly few resources that explore the effects not only of multiple asset classes in your portfolio but also of varying spending methods. This addresses both issues by offering a new tool to help compare truly diverse retirement strategies.


1. How To Manage Investment Drawdowns By Thinking Differently

I suspect the most popular post of the year reached that point because it directly addresses the thing we all struggle with at some point — fear of loss.  This touches on investor psychology and the beneficial effects of asset allocation not only in meeting our financial obligations but also our emotional needs.


I’d like to thank every single one of you for making 2016 such a fun year. If you enjoy the site, perhaps you can share this post with friends and family as a sampling of the types of information and insights Portfolio Charts has to offer.  I have lots of exciting ideas for the new year, and look forward to sharing them soon.

May 2017 be the best year yet!



Perpetual Withdrawal Rates Are The Runway To A Long Retirement


There’s a decent chance that anyone who has considered retirement with some amount of self funding has heard of the concept of the safe withdrawal rate — the amount of money that one can safely spend every year without prematurely running out of money.  First proposed by William Bengen in 1994, the math is pretty well established by now and many well-respected authors have written extensively on the subject dissecting it from different angles.

There’s also a pretty good chance that that the average person following a safe withdrawal rate does not actually understand how it works, and that lack of context can cause quite a bit of confusion.  You see, the various studies and calculators that determine SWRs do so based on a myriad of very narrow assumptions, and breaking from those assumptions also breaks the conclusions.  I’ve written quite a bit about the asset allocation assumption and the withdrawal method assumption, and I recently realized that I’m due for a discussion on another key assumption — how long do you plan to be retired?

When it comes to retirement duration, almost any resource you find today defaults back to the same assumption that William Bengen used — that a typical person retires at 65 and lives another 30 years.  Furthermore, they define success as never going broke over 30 years based on the known historical performance of a portfolio.  When talking about the average retiree that’s really not a bad assumption, but statistically speaking there’s a very good chance you are personally not average.  Maybe good genes run in your family and you’ll live for more than 30 years, or maybe you’d like to retire early.  Which begs the question:


What is the safe withdrawal rate for a very long retirement?


I personally think that’s asking the wrong question, and that attempting to answer it using the same methodology misses the larger point.  To explain, let’s start by visually exploring how safe withdrawal rates change based on retirement duration.  Here’s a chart that shows the SWRs for the Classic 60-40 portfolio.


Classic 60-40 SWRs

The column in blue is the result you would find simply by using the default 30-year assumption of most retirement studies (you can read about small variations in numbers here).  Clearly that doesn’t tell the whole story, and SWRs vary a lot based on the timeframe you’re interested in.  They do, however, start to approach a single long-term number the longer out you look.  Like an airplane gliding into a smooth landing, this portfolio looks to have a floor of about 3.5%.  Wouldn’t it be nice to be able to calculate that value directly?

Well you can!  It’s called the “perpetual withdrawal rate” and it acts like the runway the plane is aiming for. Check out the dark green perpetual rates for the same portfolio.


Classic 60-40 SWRs and PWRs

So what is a perpetual withdrawal rate, anyway?

By definition, safe withdrawal rates plan for failure.  They are explicitly defined to cause you to just barely not run out of money under certain historic conditions.  In contrast, perpetual withdrawal rates follow the first rule of investing — don’t lose money!  These are the withdrawal rates that preserved the original inflation-adjusted principal even at the end of the single worst investing timeframe of a given duration.  By weathering the storm and leaving you with the same amount of money you started with, you’re prepared not to quietly pass away with a few dollars remaining but to start all over again.  Even if you’re unlucky and the worst-case scenario repeats, your portfolio is still protected.  Perpetual withdrawal rates are designed to last forever, which is why they are popular among college endowments and other institutional investors.

One can see from the chart that instead of coming in for a landing, perpetual withdrawal rates take a little time to reach their ultimate cruising altitude.  However, they have a nifty quality of reaching a steady-state level quite a bit more quickly than SWRs, and depending on their consistency some portfolios manage it faster than others.  Here are the Withdrawal Rates charts for several different portfolios.  Ignore the absolute numbers for a moment, and note the relative differences in the dark green PWR columns.

This slideshow requires JavaScript.

This quality of perpetual withdrawal rates to manifest relatively quickly even for volatile portfolios and more so for consistent ones has two important implications for early retirees.

First, it is not necessary to run a 50 or 60 year simulation to determine the ultimate SWR floor for a portfolio.  Calculating the withdrawal rate that consistently perpetuates the inflation-adjusted principal is a more direct method to arrive at the same number.  This allows us to expand our planning tools to include many more types of investment assets that may simply not have been around 50 years ago.

And second, high short-term PWRs are very valuable from the perspective of investing psychology.  One of the biggest problems with traditional safe withdrawal rates is that it’s really difficult to know in real-time (without the benefit of hindsight) when a significant drop in your portfolio value is normal or if it indicates that the plan is fundamentally broken.  That understandable fear can cause you to lose sleep or even abandon a perfectly good plan.  How can PWR information be used to fix that?  Let’s look at an example.

Picture yourself as a retiree with 100% of your money in a total US stock market fund such as VTI and using a conservative 3.5% SWR.  Because that’s close to the historical perpetual rate, you can see in the data that this would have lasted pretty much forever.


Now look at the 10-year PWR, and imagine you were one of the unlucky retirees with this portfolio who watched your inflation-adjusted portfolio drop an average of 7% (including market losses and withdrawals) every year for a decade.  If you hung on and stayed the course you would have survived thanks to a late stock market push, but would you have had the intestinal fortitude to make it that long without changing portfolios?

In contrast, imagine you had the exact same SWR with the Golden Butterfly.


Look again at the 10-year PWR.  Even in the single worst-case decade that we have data for, you would have spent your 3.5% a year and come out the other side with your original inflation-adjusted principal intact.  Both portfolios would have ultimately succeeded in funding a long-term retirement at that withdrawal rate, but which experience would you have preferred?

Perpetual withdrawal rates designed to maintain principal serve as effective guideposts along the retirement journey to reassure that you’re on the right path.  I would argue that this last point is especially important for early retirees, as remaining grounded in the real-world will ultimately make any plan much easier to sustain for an investing lifetime than relying on faith in a retirement study looking only at distant endpoints and very long term averages to come to your rescue.

Of course, there’s a lot more that goes into early retirement planning than picking a portfolio that supports a suitable perpetual withdrawal rate.  Once you’re a little older, it may make sense to loosen up a bit and pay more attention to the sub-30 year SWRs as you look to finally spend down your money.  There are also other withdrawal methods than the simple constant dollar method, and perhaps an alternative method may pair well with a portfolio you like.

And speaking of portfolios, some people simply don’t trust certain assets or portfolios and I have absolutely no problem with that.  Every portfolio has different perpetual withdrawal rates, so study them for yourself and decide what works for you.  I’m not trying to force any one system on you, but to offer a new thought process that maybe you didn’t know was available.

When studying options for a long and happy retirement, don’t box yourself in with safe withdrawal rates.  Reset your mindset from planning for failure to planning for success, and look for the underlying perpetual runway that SWRs approach over time.  Consistent portfolios with high short-term perpetual rates can not only support your long-term financial needs but also your short-term happiness, so understanding how asset allocation affects the journey is a critical step in making a sustainable decision.  The Withdrawal Rates calculator is my contribution to that asset allocation conversation, and I hope you find it useful.

You’ve done a wonderful job saving for retirement.  Plan for how to make your portfolio last in perpetuity, and that will allow you to spend less time fretting about the markets and more time getting on with enjoying the new life you worked so hard for.  You’ve earned it!


Less Chainsaw, More Scalpel


After talking to a few people about my last calculator update, I found that perhaps I wasn’t clear enough about my motivation.  I also realized that I cut unnecessarily deep with the changes, which probably added to the confusion.  So allow me to offer both an explanation and a few improvements.

I’ve been spending a lot of time lately really diving into the source data and learning about general best practices from other people who blog about investing.   One thing I’ve learned is the importance of respecting data ownership.  Being meticulous about what I show and what I do not should allow me to continue doing what I enjoy — remixing portfolio data in creative new ways and sharing the results with all of you — without stepping on any toes.  All of the underlying data is compiled from public information, so please go directly to the source for the annual returns of a specific index and then come back here for all the portfolio analysis you can handle!

That said, I admit in retrospect that I addressed the issue too simplistically by limiting all information for annual returns in a few calculators.  That hid not only the underlying data but also valuable information about different portfolios.  To fix that, I’ve reverted back to the original tools and implemented a much more surgical approach.

The Heat Map and Rolling Returns calculators now behave exactly like they did before and hide the annual returns only when you do not allocate at least 10% to two different assets.  Likewise, the Benchmark calculator has the “annual returns difference” chart back and hides the results only if you do not use both asset allocations.  I believe that strikes a reasonable balance between providing as much information as possible for portfolios while remaining respectful of the asset sources.

Thanks to everyone who provided feedback on this.  As always, if you have any questions or suggestions please feel free to contact me.


Minor Calculator Updates And A Note On Data


As Portfolio Charts has grown by leaps and bounds over the last year, so has my sense of responsibility for being a good citizen in the data-sharing community.  In an effort to respect the underlying data that drives the site and to support the sources that provide it, I’ve made a handful of changes to the calculators to hide the detailed annual returns for individual assets:


Heat Map

The mouse-over functionality has been disabled.  If you’re interested in returns more specific than the colors indicate, try the Long Term Returns and Rolling Returns calculators.  I’ve also removed a few data points that were made redundant by the latest Drawdowns calculator.


Rolling Returns

The minimum timeframe is set to three years.



The bottom bar chart that showed the annual difference between portfolios has been removed, making more room for the growth chart.  If direct comparisons over different years interest you, I personally like looking at different Heat Maps side-by-side.


My ultimate goal in making these changes is not to restrict information but to establish trust.  I believe a professional approach that respects the rights of the groups that make this information public will make it easier to add more data in the future.  And in the meantime, it’s simply the right thing to do.  For industrious investors looking to build your own spreadsheets, all of the data is publicly available for your own personal use and I encourage you to seek it out directly from the various primary sources.

As always, if you have any suggestions for improvement please feel free to contact me.  With your help, both the individual calculators and the site as a whole will continue to get even better.


UPDATE: The above changes are now obsolete.  Read this for an explanation.


Black Friday Is A Good Day To Evaluate Your Expense Ratios


Thanksgiving is maybe my favorite holiday of the year.  Between family, football, and an insane amount of delicious food, the fourth Thursday of every November is something I always look forward to.

But while the traditions of Thanksgiving are something I hold dear, the traditions of the day that follows are something I’ve never really gotten into.  Of course I’m talking about Black Friday, when shoppers get a day off of work to recover from eating too much and line up early in the morning to experience things like this in search of a good deal:



Now I appreciate saving money as much as the next person.  Studies have shown that the average person spends about $400 on Black Friday and that the average discount is about 40%.  (I’ll leave whether that 40% savings is realistic for another discussion).  That means that the average Black Friday shopper hopes to save about $250 by skipping sleep and navigating some pretty serious crowds.  Even if the scene is not my cup of tea, I can see where people are coming from.

So am I simply being lazy by staying at home and enjoying a peaceful weekend?  Maybe. But if anyone asks, I just say that I’m doing something that will save way more money than fighting over an inexpensive television or running for the last Princess Unicorn so you won’t have to buy one from that guy at the office.

I’m evaluating my expense ratios.

Sound silly?  Let’s run a few numbers.  The average 401k today contains about $100k, and the average actively managed equity mutual fund has an expense ratio of about 1.3%.  That means that many people spend about $1300 every year on investment expenses.  Now 401ks are notorious for having a poor selection of funds, but almost all of them offer some sort of low-cost index fund as an option.  Since the typical index fund alternative has an expense ratio of well under 0.2% with no measurable long-term disadvantage in returns, that means that lots of people pay about $1100 a year more than they have to in their retirement accounts.

Take a moment to switch to new low-cost index funds, and that savings is yours to keep not only this year but also every year into the future.  And due to the power of compounding the difference really adds up over time.


This slideshow requires JavaScript.


These two Portfolio Growth charts show the exact same asset allocation, and the only difference is that one has an expense ratio of 1.3% typical of actively managed funds while the other has one of 0.16% using low-cost index funds.  Over time, small differences in expenses add up to hundreds of thousands of dollars!

So if you’re in a deal-seeking frame of mind, what seems like the best return for one day of effort — saving a few hundred dollars today or many thousands of dollars over a lifetime?  The choice is up to you, and I understand that “both” is still an option, but I’ll personally take the expense ratio savings and a turkey sandwich on the sofa over circling the mall parking lot for hours for a place to park.

Whether you love Black Friday or prefer to avoid the crowds, consider making the weekend after Thanksgiving an annual event to review your expense ratios.  Remember that they do change every so often so it’s worth checking in and shopping around.  It only takes a few minutes of your time, it falls at an advantageous time of year to evaluate any tax consequences of changing funds, and the potential savings from finding a better deal are tremendous.  And what better way to balance the excitement of gift giving than to take a moment to check in on the ultimate layaway gift to your future self?

You’re worth the effort.  Happy Thanksgiving!




Why Passive Investing Is A Great Choice


One of the things I’ve found most interesting in the feedback I’ve received with Portfolio Charts is the diversity of people who appreciate it.  Whether it’s an investing newbie eager to learn about index investing, a an experienced investor comparing portfolio options, or even an occasional professional fund manager interested in the calculation methodology, it’s exciting to see so many people find value in the clear and unbiased representation of good data.

In an effort to offer a helping hand to the first of those groups, I created a new page to outline the basics of how to use the information on the site to build and manage a portfolio of your own.  It’s just a start, and I do plan to expand that type of information over time, but luckily it’s really not that complicated!  So if you’re new to investing or know someone else looking take the plunge, that’s a good place to start.

But every good explanation of “How” deserves an equally good explanation of “Why”.  This is something we all need to be reminded of occasionally no matter where we are in our individual investing experience.


Why is passive index investing a good idea?


Of course there are lots of good reasons, but allow me to present a few of my personal favorites.


It’s the best use of your time

Plenty has already been written on Warren Buffett’s opinions on index investing.  If you’re not up to speed, the most famous and successful active investor of all time recommends that most people simply stick to passive index fund investing and plans to do that with his own estate after he’s gone.  On the surface, that seems kind of strange.  But when you get down to it, Buffet is simply being refreshingly honest and self-aware.

Buffett has been hugely successful as an active trader.  But he is also uniquely talented and privy to information and opportunities the rest of us will never have access to.  And even more importantly, he dedicated his entire life to investing — a sacrifice most of us are unwilling or unable to make.  By noting that most investors would do just fine with a passive asset allocation, he verbalizes the old 80/20 rule that affects so much in our lives.  80% of the investing benefit can be achieved with very little effort at all, while the last 20% is tremendously difficult.

Rather than dedicating your own life to squeezing out that extra bit of return, you’d very likely end up much better off financially by spending that time advancing your career or negotiating a raise.  You may not be as talented an investor as Warren Buffett, but he is not as good of a teacher, firefighter, or engineer as you are.  Making money and saving for retirement is about so much more than squeezing the last basis point out of investment returns.

By investing in a passive asset allocation, you maximize the tradeoff between the returns and the effort required to achieve them.  That will free you to pursue personal interests far more profitable and enjoyable than reading corporate filings all day and watching the markets like a stressed-out cat with one eye on the mouse and the other on the dog.


It’s the best bang for your buck

Of course, even if one does not want to do all of the work that Buffett does, why not hire someone to do it for you?  Historically that person has taken the form of a mutual fund manager or private investment adviser, but today it is also filled by robo-advisers and PhD-backed investment algorithms.

Now all of these options have their place, but they do share one thing in common.  They’re not free.  The average expense ratio for an actively managed mutual fund today is about 1.3%.  That may not sound like much, but consider that the long-term inflation-adjusted CAGR of a typical 60/40 index blend is only about 5%.  So on average that 1.3% fee represents about 25% of your potential profits that you could achieve by using a similar passive portfolio.  That’s a big handicap to overcome, and this is why numerous studies have shown that even when some managers do manage to beat the market before fees, inexpensive index investing is usually more profitable in the long run.

Robo-advisers are usually a better deal, with fees around 0.3%.  They’re created by very smart people, and I trust they offer reasonable advice.  However, consider that they accomplish lower fees by offering a smaller number of portfolio options that invest in index funds with an asset allocation selected for your risk tolerance.  Now that’s an excellent service that may be appealing to a lot of people, but proactive types may wonder why they should pay 0.3% a year when they can get similar information on a site like this one with portfolios recommended by equally-credentialed experts for free.

I think the most common answer to that question is simple fear and insecurity.  Most people don’t trust themselves to do something that seems so complicated.  Which leads us to the next point….


It’s really easy

Investing is intimidating.  I get it.  Maybe you don’t see yourself as a numbers person, and don’t trust yourself to make the best financial decisions.  Maybe you hold out hope that surely there’s someone way smarter than you who can do even better.  Or maybe the constant drone of ever-changing financial news has rightly convinced you you’ll never be able to keep up and must outsource that effort to someone else.

But wise investing really isn’t that difficult.  You don’t have to beat the markets to be successful — growth is built in!  You just have to pick a battle-tested plan and stick with it.

The hardest part is finding a portfolio that works for your personal financial and emotional needs, which is why so much of this site focuses on data and examples to explain the tradeoffs associated with different investment decisions.  But running your own passive portfolio is extremely simple to do and only requires attention once a year.  If you need a primer, check out my previously mentioned guide on how to manage your own portfolio.


It makes you a better investor

Being a passive investor does not mean you are blind to the markets.  To the contrary, a wise investor can quantify the natural uncertainty of a particular portfolio and select one that maximizes return for the risk.  Now that requires a lot more information than you typically find in asset allocation discussions, but luckily there are lots of tools to help.

By knowing how and why you invest the way you do and by taking the time to truly understand not only the average return you hope to receive but also the turbulence you may expect along the way, you build an educated level of discipline that the average investor does not enjoy.  This discipline is critical to weathering inevitable market storms, and that ability to stick with the plan has a measurable positive effect on your long-term returns.  In fact, by making it too complicated the average investor is their own worst enemy and the average professional doesn’t do much better.

Taking charge of your own life savings and forming a simple set of rules you can stick to will make you happier and wealthier in the long run.


A note on other options

So is passive index investing the only good option for reasonable investors?  Of course not.  Just like there are different portfolios for different types of people, there are many investing methods as well and I’m not so quick to dismiss them just because they do not align with my own.  I can absolutely see the benefits of dividend growth investing, company valuation metrics, income-producing rentals, and other trading strategies that have made some people very wealthy.  For every person who points out that Warren Buffett recommends that his wife put her money in simple stock and bond index funds, I’m still very aware that Buffett himself amassed all of that money by following absolutely none of that advice.

So please make no mistake — My goal is not to talk you out of anything but to offer a positive message for why passive asset allocation is a great option to consider.  It may not ultimately be for everyone, but I believe it can work for anyone.  Whether you’re a new investor looking for simple but effective options, an experienced active investor considering alternatives to your own plan that maybe isn’t working like you hoped, or even an investment professional seeking new ways to connect your clients to strategies they can appreciate and stick with, I recommend taking the time to read up on the many good options available.

Investing doesn’t have to be so difficult.  Plan wisely and keep it simple, and the returns will come to you.




Discover Something New With The Updated Portfolio Finder


When I was younger, I really enjoyed visiting my local used record store.  There was always something cool about walking into a sea of thousands of amazing albums I had never heard before and looking for something new and enjoyable.  Sometimes you’d hit it big and sometimes you’d run across something really weird, bit it was always a fun experience.

But strangely enough, I very rarely walked out with a purchased album.  Sure there was more great music there than I would ever be able to listen to in my lifetime, but in a way it ended up causing more problems than it solved.  You see, I’d have to take the time to listen to all of those albums in the store to know which ones were truly my taste, and frankly that was a lot of effort.  So I’d usually ultimately go on a friend’s recommendation rather than truly explore for myself.

People used to wonder back then how a relatively expensive music download service would ever take off when there were cheaper local options like my used record store.  But to me the most revolutionary new feature was not the “purchase” button, but the “search” box coupled with previews.  With an entire catalog available at the click of a button, good music was easier than ever to discover.  In my opinion breaking that barrier between the massive sea of music options and the ease of finding the right music for you was the key in driving the entire industry forward.  It’s about connecting people to artists.

I’ve applied a lot of that experience to Portfolio Charts, and it’s probably why the single tool I’ve spent the most time on is the Portfolio Finder.  If the Portfolios section is about showcasing the most popular albums, the Portfolio Finder is the app that lets you dig through the ocean of undiscovered talent for something truly original.  It’s been an ongoing project, and today I’m happy to announce the next iteration that should make it easier than ever to discover a portfolio idea to meet your personal investing goals.

The core of the new Portfolio Finder is a completely rebuilt calculation engine that makes it about 100x more lightweight than before.  Running calculations for every possible asset combination requires a lot of processing power, and that limited what I was able to do with the final data.  But the fancy new method has freed me to focus on some interesting features, including the one thing most glaringly missing on a site called Portfolio Charts — a helpful chart!


Let’s start with the inputs, as the Assets table is a little different than before.  Instead of studying every possible combination of assets including many you have no interest in, the new table asks you to select up to ten assets that you’d like to consider in a portfolio.  To do that, you add a “C” next to that asset.  You can also think of the C standing for “comfortable”, as those are the assets you’d be comfortable purchasing with your own money.  Also, you can type an “R” to select up to five assets that are required to be in the portfolio.  To remove an asset, simply type a dash or select it from the dropdown.

With the asset options selected, the Portfolio Finder goes to work.  First, it figures out every possible equally-weighted combination of the assets you selected to consider (up to 637 for the full ten assets).  These are all of the gray points on the chart.  Next, it applies filters for the required assets.  These are all of the green points on the chart.  And finally, it searches these qualifying portfolios for the top-10 risk-adjusted options. These are the points in blue.  These ten most consistent portfolios are then listed in the bottom table in order of returns.

At this point, you’re probably wondering what constitutes a top “risk-adjusted” return.  The technical answer is that these are the top portfolios sorted by CAGR / Max DD, very similar to the Sharpe ratio.  For the layperson, the most consistent portfolios are the ones to the farthest top-left of the chart.

Note that rather than cherry-picking a single start date that might be quite deceiving, all of the numbers are start-date-independent.  Not only do the deepest and longest drawdowns look at the entire history as a whole, but the stated returns are also the worst rolling 15-year returns for each portfolio regardless of when you were lucky enough to start investing.  So there’s absolutely no rosy advertising here nor any start date bias, as all portfolios are shown with no makeup and in their worst light.  But think of it this way — if the shown portfolio met your financial returns needs even in the worst timeframe it exceeded it in all others, and these portfolios represent the most consistent options not only in terms of drawdowns but also in long-term returns.  For more information on the metrics and methodology, be sure to read the FAQ.

With the new setup, I believe the Portfolio Finder is more powerful than ever in exploring new ideas that perhaps you’ve never considered.  While the 10-asset limit may feel a little restrictive at first, tinker with the choices for a while and you’ll start to really appreciate the top scatter chart.  To illustrate, let’s study a common question:


What single asset has been most effective at diversifying a US stock portfolio?


For the sake of argument, lets assume that all US stock assets are on the table.  So I entered a “C” to consider all nine segmented size and value options.


As you can see, there are some pretty good returns in there but the deepest drawdowns are all pretty steep.  If you’re not prepared to endure at least a 40% drawdown you really have no other choice but to look for other options to add to the portfolio.

So first, let’s look at total international stocks.


Note that I used an “R” to require total international.  This forced them into every qualifying portfolio while using all of the considered options to fill in the gaps.  The green dots represent every portfolio that includes total international, while the gray dots represent the rest of the portfolios that do not include it.

If anything, this simply knocked off a few of the top returning options with no real improvement in drawdowns.  So let’s try bonds instead.


Now that’s a little more interesting.  You can see in the scatter chart that the options started to move to the left without notably sacrificing returns.  And scanning the bottom table you can start to appreciate the tradeoffs.  Your natural instinct might be to jump at the top option on the list, but the fifth option — a simple 50/50 split of MCV and TBM — was within 0.3% a year but with a significantly less painful deepest drawdown.  That’s a pretty nice alternative.

Finally, let’s try a volatile real asset like gold. How do you expect it to affect the results?


Surprised?  Requiring gold in the portfolio had a terrific positive effect on drawdowns while improving overall returns for the cluster.  And you can see from the top portfolios that there are lots of interesting options in the same risk and return ballpark.

Of course, that’s just the beginning and there are more than 83,000 possible portfolios based on your inputs.  So if you dislike gold or believe strongly in international diversification, no problem.  Try other assets and find something that does work for you.  The point is not to drive you to any one portfolio — or even to suggest that every portfolio that comes up on the list is a good idea — but to open your mind to new options you hadn’t considered so that you can research them further and ultimately find one you’re personally comfortable with.  Only you can make the best decision for your own life savings, but good decisions require good information and I hope you find the new tool helpful.

Finding new music isn’t so difficult anymore, and finding new portfolios doesn’t have to be either.  Give the new Portfolio Finder a spin, and hopefully you’ll find a tune you’ll enjoy for a lifetime.



Relevant Posts:

The Ultimate Portfolio Guide For All Types Of Investors

The Portfolio Finder Just Got A Little Smarter


How To Manage Investment Drawdowns By Thinking Differently


One of my absolute favorite movies of all time is Raiders of the Lost Ark. There’s a famous scene where Indiana Jones is confronted by an intimidating swordsman clad in black, and the crowds part in anticipation of an epic fight.  How does Indy handle such an ominous threat?

I think my favorite part is the look of utter irritation on Indy’s face, as the feared enemy is really more of a waste of time than a true threat to anyone with a clear mind and bit of common sense.  The scene is also a brilliant piece of film making, as the quick and unexpected exchange plays on the expectations of the audience.  A scene like this almost always ends in a drawn-out fight even when it doesn’t have to just because that’s how movies usually work.  But Indy knows better, and the audience is left to laugh and wonder why nobody else has thought of that.

I see a similar dynamic all the time in investing, where the swordsman represents the dreaded market drawdown.  It’s big, it’s mean, and it’s unavoidable.  So what are the options for an investor when confronted with the very real risk of loss?  Here’s a typical sampling of responses — tell me if any of them sound familiar:


Toughen up, Buttercup.  Losses are unavoidable, and you need to raise your risk tolerance.


Sure major losses have happened in the past and will happen again, but they’re rare and I’m willing to risk failure.


Risk is good!  Taking a beating is a normal part of investing!


That’s why I actively trade rather than passively invest.  I want to avoid major losses.


On the one hand, none of the answers are unreasonable and there’s something to be learned from each of them about how to fight the drawdown swordsman in your path.  However, whether it’s some brand of machismo, denial, financial stockholm syndrome, or over-confidence, the response by many investors reminds me of the expectations of the film audience in that they all assume that a brutal financial fight is inevitable.

Such expectations are not unjustified, as quite a bit of today’s popular investing advice carries substantial risks.  I think that truly understanding the potential downside of our investing options is a critical step in making an intelligent portfolio decision.   Many of the tools on this site are designed to highlight not only the average returns but also the worst outcomes, but after exploring it a bit more I think there’s room for a new tool that helps people see past the positive spin for a portfolio by mapping every single loss in one place.  I call it the Drawdowns calculator.


The Drawdowns calculator maps every single portfolio loss since 1972 from any high point along the way.  Each line represents the effects of the inflation-adjusted compound returns on the portfolio account value, and by studying these lines one can see not only how deep the losses cut over time but also how long they took to recover.

Astute observers may note that some of the lines dive from positive to negative in later years on the chart.  This is because the calculator does not simply declare the portfolio recovered when it temporarily turns positive only to return below the baseline later.  A loss briefly interrupted by a head fake is still a loss, and a drawdown is only declared resolved when the portfolio permanently recovers above its original value.  Also, one should note that the deepest drawdown number is based solely on year-end returns.  It’s absolutely possible that a portfolio experienced something even worse than that in the middle of a year.

As you can see from the chart, the downside risk for putting all of your money in the stock market is substantial.  A 51% deepest drawdown, regular losses of 30%, and a longest drawdown lasting 13 years make for a particularly scary market swordsman.  If one accepts that such risk is the price to pay for investing, then the advice to toughen up and learn to brawl your way through it makes sense.

However, allow me to don my Indiana Jones hat and pull out my asset allocation pistol.

This slideshow requires JavaScript.

Interesting!  If deep drawdowns bother you more than long ones, the Desert Portfolio is a great choice.  If long drawdowns bother you more than deep ones, the Merriman Ultimate might deserve a look.  And if you prefer to limit losses in general, the Golden Butterfly has been far more stable over the years than the stock market.  Remember, the charts do not show just a few selected losses — they show all of them.

The dreaded market swordsman in black doesn’t look so tough anymore.

Each portfolio has a different drawdown profile, and you can explore the Portfolio pages to look for many more options.  You can also play with the new Drawdowns calculator to try out your own ideas.  Of course the past can’t predict the future, and there’s nothing to say that this year won’t mark the start of a new worst-case scenario.  But studying the past for evidence of consistency can absolutely help you size up the known drawdown opponent you’re facing.

And by the way, be sure not to fall into the trap of believing that lower risk must also mean proportionally lower returns — despite what you’ve heard, asset allocation doesn’t always work that way.  Explore the other charts and calculators and you’ll see that for yourself.  The Portfolio Finder is especially good at finding low-loss / high-return portfolios, and with new information in hand I’ll be adding Deepest Drawdown data shortly.

My hope is that this information will be informative not only for passive investors who are trying to quantify their own risk tolerance but also for active ones. Whether your instinct is to power through risky investments or actively try to dodge the worst of their attacks with P/E ratios and moving averages, I think that by objectively studying the worst-case results of a passive approach one can acquire some much needed perspective.  Maybe all of that pain and effort truly is necessary to meet your personal goals, but maybe it’s not. Perhaps there’s a much easier way forward you simply haven’t considered.

Indiana Jones chose brains over brawn and saved his energy for more productive activities.  Try the new Drawdowns calculator and decide for yourself — What type of investor are you?


An Illustrated Guide To Retirement Spending Strategies


In all my years of working, I have yet to run across someone who didn’t appreciate getting a raise or become really agitated with the prospect of taking a salary cut.  Justified or not, the way that income level sets personal expectations seems to be ingrained in each of us from a young working age.  And after thinking that way for perhaps decades, it should come as no surprise that such a mindset doesn’t necessarily immediately evaporate the day we retire.  If you have a choice, do you really like the idea of leaving retirement income on the table?

So when studying the ins and outs of retirement finance, one little detail tends to really nag at the minds of certain optimization-oriented people — the assumption about the retirement spending method.  You see, the vast majority of retirement research (including the Withdrawal Rates calculator on this site) uses a rather simplistic model for retirement spending that assumes purchasing power remains constant from the day you retire to the day you die regardless of how the markets perform.  The goal of these studies is simply to protect you from the worst-case scenarios, while the prospect of making millions in the markets you’re not allowed to touch is not addressed.

While I actually really like the straightforward traditional approach as a sanity check for people with a good feel for the amount of income required for their own happiness, I do appreciate the perspective that there’s more to the retirement story than not running out of money with a flat spending trajectory.  In lots of cases, it really is safe to give yourself a raise in retirement.  And in others, cutting back a little when the markets do poorly can work wonders for the long-term safety of your portfolio.

There’s actually been a ton of research in this field, with lots of scholarly-sounding algorithms claiming to be the best method to calculate retirement spending.  But like lots of investing topics, there are very few good resources for modeling these methods in a dynamic and repeatable way so that you can identify the best one for you and your personal asset allocation.  So what does an engineer do when he finds an open calculation sandbox like that?  He builds a spreadsheet!


The Retirement Spending calculator is designed to compare a variety of different popular withdrawal methods for any asset allocation you choose.  And like every other tool on this site it approaches the problem from a start-date-independent perspective, overlaying the results for the same plan starting in every year since 1972 (the most data we have available for so many assets).  The end result is an easily-adjustable snapshot of the historical big picture containing not only the best times but also the worst.

You can see in the above screencap that the calculator has two separate charts.  The first maps the inflation-adjusted spending levels for each of our hypothetical historical investors, and the second maps the full range of account balances for all of these investors over the years.  Use the first to gauge how the allowed spending varied over time, and the second to keep an eye on the portfolio trends in the background.

The inputs include the asset allocation, starting portfolio value, withdrawal method, and withdrawal rate.  Note that unlike the Withdrawal Rates calculator that determines withdrawal rates automatically, the Retirement Spending calculator allows for manual tinkering.  I’ve found that you can learn a lot from playing with the numbers and watching how the charts move — give it a try, and you’ll see what I mean.  For some spending methods certain inputs may appear and disappear, but experiment long enough and it will all make sense.

The Minimum Required Spending and Minimum Tolerated Balance inputs are completely optional (you can set them to zero to get them out of the way), but I definitely recommend using them.  They control the dashed horizontal lines on the two charts, and help identify some really critical data points in evaluating any retirement plan.  After all, despite the traditional definition of retirement failure as “running out of money” there are actually three ways that a withdrawal plan can fail you:

  1. You run out of money
  2. Your portfolio dips low enough in a volatile market to spook you out of your plan and you abandon it altogether, likely selling low in the process
  3. Your allowed spending falls below your minimum needs (food, rent, etc) and there’s no more room to cut

Failure #1 can be easily seen in the account balances chart by the blue field hitting the zero line.  The SWR in the example above is selected to model the traditional definition of “success” meaning that in the single worst retirement scenario you ran out of money at the end of 30 years.

Failure #2 is marked by the black dashed line on the account balances chart, and is set in this example to a 50% drop in the original portfolio value.  Are you the type of person who might get extremely nervous with a 50% drop in real portfolio value just 6 years into retirement?   I sure am.  If so, maybe a different asset allocation or spending method might solve the problem.

Failure #3 is marked by the black dashed line on the spending level chart.  Note that there are no failures in this example because the Baseline % method is specifically designed to never lower spending, but other methods like Constant % and VPW are not so certain.  If there’s a real chance of your spending method not supporting your minimum needs, perhaps a new plan might be necessary.

There are a bevy of different withdrawal methods out there to choose from, but for now I’ve started with four — Constant $, Constant %, VPW, and Baseline %.  Rather than detailing every option here, I highly recommend reading the Methodology for details and working examples for each.  As an example of how the withdrawal method affects retirement performance, here are the charts for each available method for the same Classic 60-40 portfolio and spending/balance requirements:

This slideshow requires JavaScript.

That’s quite the difference in both spending levels and account balances!  I’ve found from my own experiments that certain withdrawal methods work better for some portfolios than for others, and I hope you find the tool equally helpful in exploring all of the possibilities for your own portfolio.  IMHO, there’s no such thing as a single superior withdrawal method for every investor and asset allocation.

Just as I aim to expand the portfolio options as I find new ones, the plan is to also expand retirement spending methodologies.  If there’s one you would particularly enjoy being added to the list, please let me know.  And while I can’t go into every method in detail here (that would be a really long post), I imagine that I’ll write quite a bit about the pluses and minuses of different methods in the future.

Gathering, processing, and sharing information like this is a growing process.  There are many great tools for exploring the accumulation side of the equation, and the Retirement Spending calculator will hopefully empower us all to become better and more knowledgeable investors once it comes time to put our hard-earned investments to good use.  No matter where you are in that journey, the best time to start planning for the future is today.

Plan away!