START DATE SENSITIVITY

The Start Date Sensitivity chart in the various Portfolio tools studies the past and future returns of a portfolio at various points in time to illustrate how actual returns varied from expectations.  Use this to study the dependability of a portfolio over time, to find a stable asset allocation that reliably met its goals, and to serve as a reality check before trusting a tempting but potentially deceptive historic average with your life savings.

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SDS-walkthrough

 

How To Interpret The Chart

For each year on the start date sensitivity chart, the calculator looks both backwards ten years and forward ten years and reports the inflation-adjusted CAGR for both numbers.  The red line tracks the backward-looking return and the blue line tracks the forward-looking return.  The vertical bars track the difference in those two numbers — blue bars mean that the next ten years were better than the previous ten years, and red bars mean the opposite.

Studying the variety of differences in those two numbers gives you a very good idea for the stability of returns over time.  The closer the two lines, the less sensitive the portfolio is to backtesting start date bias.

 

Calculations

 

Best Improvement

The best improvement is the largest return difference for the luckiest investor.  For reference, the best improvement of in the above chart is the numerical length of the longest blue bar  reference date.

 

Worst Shortfall

The worst shortfall is the largest return difference for the unluckiest investor.  Imagine purchasing a fund based on a high previous 10-year return but personally receiving this amount less than that number per year for the next ten years after you bought it.  Talk about disappointing!

 

Start Date Sensitivity

This is the difference between the best improvement and worst shortfall.  Think of it as the spread in happiness relative to expectations between all of the different investors that bought the portfolio over time.  I see it as a simple quantitative way to help you compare the relative dependability of two portfolios.  Smaller numbers have historically been better at meeting investor expectations than larger numbers, with less timing luck required to get the advertised return.

 

Additional Reading

Original Overview : Some Portfolios Are More Trustworthy Than Others