When I finally crawled out of debt and found myself with a little bit of money to invest, my next step was figuring out an investment strategy. I’m not a day trader, so I wasn’t interested in finding the perfect tool for buying and selling stocks. Rather, I wanted a way to assess how my wealth would grow based on the asset allocation I chose.
I found several tools that do a great job of letting you test out the performance of different portfolios. If you play around with the following tools and calculators, you should be able to find a portfolio that fits your unique needs.
Vanguard, Fidelity, and Other Large Brokerages: To Build an Institution-Specific Portfolio
If you already have a retirement or brokerage account with a big institution, then that’s the logical place to begin your hunt for a good portfolio. I invest with Vanguard for a variety of reasons, but one is the section of their site dedicated to investment calculators and tools. This is a great resource for constructing mock portfolios and seeing how they have performed in the past.
They have sections that help you set an asset allocation, compare fund performance side-by-side, plan for retirement, and even to plan for education expenses.
In my estimation, the most useful area is their mutual fund and ETF screener. This page allows you to find funds that fit your specific needs based on categories like fund type (stock, bond, domestic, international, etc.), fund value (small growth, large value, etc.), expense ratio, and total return.
Of course, if you don’t use a large brokerage, tools like this will be less applicable. Each institution’s services are tailored toward investing in the funds they own, so it wouldn’t make much sense to use them if your investments are spread among several different accounts.
Portfolio Charts: To Find the Portfolio You Might Have Missed
Portfolio Charts allows you to work with 12 different calculators to build a personalized portfolio. Each calculator provides valuable analysis on a different aspect of your chosen asset allocation. They allow you to quickly figure out a given portfolio’s sustainable withdrawal rate, the time to financial independence, annual returns, and much more.
It’s simple to test out different strategies, and all the calculations produce beautifully rendered charts. Overall, it scores points for being intuitive and easy to use.
For those looking for good portfolio ideas in the shortest amount of time, I recommend going straight to the “Portfolio Finder” page. This section allows you to input your preferred asset allocation, your desired rate of return, and your risk tolerance. You’re then shown a set of unique portfolios that historically had the highest returns based on the inputs you provided. As the site puts it, this area is useful because it allows you to “search every possible combination of assets and identifies the historically least painful options that consistently met your needs.”
I also like Portfolio Charts for its signature flourishes, such as the “Ulcer Index,” which is a single number that approximates how stressful it would be to hold different portfolios based on how they’ve performed during recessions.
One downside to the site is that it has a tendency to run a bit slower than some other calculators. In my opinion, the wait is well worth it.
Portfolio Visualizer: For Deep Learning and Side-by-Side Comparisons
The homepage of Portfolio Visualizer is a finance nerd’s dream. The sheer number of tools they put at your disposal is impressive. You can do a factor analysis. You can build a momentum portfolio. You can look at a fund’s performance attribution. You can do adaptive allocations. To be honest, I don’t know what half of their offerings mean, but if you want to get into the nuts and bolts of portfolio construction, this is the place to be.
They also allow you to test out a wider variety of assets than any other site I found. From emerging markets to gold to REITs, it’s got you covered. It’s also great for international investors, as you can easily build portfolios based on European or world stocks.
While the level of granular detail you can get into is impressive, I find the site is most useful for the way in which it allows for portfolio comparisons. When backtesting a portfolio, they allow you to enter three asset allocations at once. Then, when you run the calculations, you’re presented with detailed information on all three portfolios on the same page. This is so convenient, and it’s a feature that’s surprisingly lacking on a lot of other sites.
The only downside, in my view, is that the site is a little too stark and utilitarian. I found the other sites on this list feel more warm and inviting in the way they guide you through the use of their tools. Portfolio Visualizers is all about the math, which makes it slightly intimidating for those of us who don’t make Excel spreadsheets for fun.
FIRECalc: To Avoid the Worst-Case Scenario
The “FIRE” in the name FIRECalc is an acronym for “Financial Independence, Retire Early.” The site has gained in popularity as the FIRE movement has picked up steam. All the young super-savers out there want to know when it’s safe to pull the trigger and leave their day job.
You use the site by inputting your spending numbers, your current savings, and your asset allocation. The calculator then shows how your portfolio would have performed for every starting point since 1871 by running a probability analysis called a Monte Carlo simulation.
FIRECalc is a good tool for the investor who’s looking to avoid catastrophe. It very quickly shows you how well a given portfolio would perform across a variety of different economic conditions. It also tells you how likely you are to end up running out of money in retirement. They use a great analogy to help make this concept intuitive:
“Suppose you are building a house in Honolulu. No one could predict the temperature for any given future date during the decades the house will be used. But if you know that it has never been under 52° in that location in all of recorded history, you could make an intelligent judgment about how much heating capacity is enough.”
The main downside to FIRECalc is that the interface feels dated. It’s not simple to find out where on the site you need to go to change your asset allocation, for instance. Another point against them is that you can only run simulations based on five types of stocks and three types of bonds. That makes the tool of limited use for those who want to invest in things like commodities or international stocks.
But if you’re interested in constructing a more standard portfolio based on stocks and bonds, and you want to know how well it can endure rough economic spells, then FIRECalc is great.
Bankrate: To Quickly Create a Simple, Balanced Portfolio
If you want a quick snapshot of basic asset allocation ideas, you should check out Bankrate’s Asset Allocation Calculator. It asks for information such as your savings, tax rate, and your future goals. It then generates a pie chart that recommends what percentages you should invest in stocks, bonds, and cash. And honestly, who doesn’t love a good pie chart?
This calculator is unique in that it asks you to input a number that reflects your outlook on the future of the economy. You can manipulate those variables and watch as the pie chart recommends more or less aggressive portfolios. This is a cool feature I didn’t find in other calculators.
I also like that they place a major emphasis on your starting age when giving portfolio advice. As the site notes, “Age is by far the most important aspect of asset allocation. The younger you are, the less likely you need this money any time soon.” That thinking might be implied by the other calculators, but there is something nice about seeing it written down and knowing that they think it should be critical to your asset allocation decision.
I’d love to see a version of the Bankrate calculator that includes more diverse investment options, but that would also require that they make sacrifices on ease, speed, and simplicity, so I understand why they have it the way they do.
Betterment: To See How You Can Save on Taxes
Learning how to buy and sell investments so as to minimize your tax burden is an art. Strategies like tax loss harvesting and automated asset allocation can save investors thousands of dollars if done correctly.
Betterment is a “robo-adviser” that prides itself on handling all the intricacies of tax management for you, a fact that their asset allocation calculator makes abundantly clear. Betterment’s calculator asks for your desired asset allocation, your current taxable and tax-protected investment numbers, and your investment horizon. Once you input the data, you can see how much money you’d save over the course of, say, 30 years, were you to reap the benefits of what they call a “tax-coordinated portfolio.”
I tried calculating how much I’d save on taxes with a 75%/25% mix of stocks and bonds, with starting retirement totals of $50,000 in both a taxable account and a Roth IRA, invested for 30 years. The result was an extra $37,000 in my account if I used their tax optimization techniques, which is nothing to sneeze at.
If you’re considering a robo-adviser for your investments, spend some time with this calculator to make sure the benefits will be worth the (potentially) higher fees that they charge (compared to DIY index investing).
The downside to the calculator is that its simplicity and ease of use comes at the expense of a lack of features. Much like with FIRECalc, it’s impossible to model a portfolio that invests in anything beyond stocks and bonds.
A Few Thoughts on Backtesting
All of the above tools use past financial data to try and make predictions about future returns. Some naysayers on personal finance message boards use this fact as a reason not to trust any portfolio arising out of such backtesting. They insist that because “past performance does not guarantee future results,” all the efforts to construct a portfolio based on backtesting are fatally flawed. They’re quick to point out that the perfect portfolio can always be cherry picked in hindsight, and that is all these calculators are helping you do.
There is some merit to that argument. You shouldn’t base your investment decisions solely on what has done well in the past. But, if you believe that history generally repeats itself, and that data analysis can help you find trends, then you should absolutely be using these tools to help inform your decisions.
To the backtesting naysayers, there is always some reason why the future will be totally different:
“The FED has been practicing a policy of quantitative easing, so everything is different now!”
“We now have Bitcoin, so everything is different now!”
“Banks are too big to fail, so everything is different now!”
All of that might be true. But we still have to do something. At a certain point we have to make an educated guess based on the most robust backtesting tools available to us, then let things run their course.
Summing Up
When dealing with asset allocations, it’s always important to keep in mind that the perfect is the enemy of the good. It’s better to start investing, even if just a little bit, than to wait on the sidelines for years searching for a portfolio you think will give you the best possible returns.
More by Drew Housman:
- The Most Motivating Financial Chart I’ve Ever Seen
- Who’s the Boss? Not Me: Why I Turned Down a Big Promotion
- I Tried to Make Money Online and All I Got Was the Nagging Sense I Was Being Scammed
The post Six Investing Tools to Hone Your Perfect Portfolio appeared first on The Simple Dollar.
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