The Equalizer chart shows how chaotic asset noise mixes into a clear portfolio signal. Use this to study index correlations, understand the return extremes that real people experienced, and explore how modern portfolios use multiple volatile assets to create a final recipe far more desirable than any single ingredient.
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Overview
The Equalizer chart shows every inflation-adjusted annual return since 1970 for a portfolio as a single line going from left to right. It also displays the annual returns for every individual asset included in the portfolio as gray lines to help visualize how they influence overall performance. You can think of it as a sound equalizer where individual years replace individual frequencies, and every asset is a single channel in the mix.
Generally speaking, portfolios with low intensity and high positive balance lead to satisfied and stress-free investors.
As you look at the gray asset lines, note how some of them track each other very closely while others swing wildly in different directions. This is a visual representation of asset correlations, and you can use this chart to help look for alternative assets to complement the ones you already own and smooth the ride for the portfolio as a whole.
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Calculations
The Equalizer chart automatically displays the highest and lowest returns of the portfolio as horizontal dotted lines. Sometimes a portfolio may have a return that you might consider an outlier, and you can exclude one more more data points from the calculation.
Note that the exclusion filter removes points equally from the positive and negative ranges. For example, excluding the top & bottom two outliers will filter both the top two and the bottom two.
Intensity
This represents the delta between the highest return and the lowest return, subject to the exclusion filter. It is scaled to single digits to make it simpler to reference, but every unit of intensity represents a 10% spread in returns.
Balance
Not every type of volatility is equally unpleasant, as nobody complains about large positive spikes while most people fear large losses. Balance represents the proportion of the volatility extremes that are either positive or negative, and is on a scale of +/- 10. For example, a balance of 0 means that the best positive returns are the same scale as the worst negative returns. +2 means that the extremes are somewhat biased to positive returns. -8 means that the extremes are highly biased towards negative returns. And a theoretical portfolio with a +10 balance never experienced a single negative return.
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