We introduced our Portfolio Analysis tool to MFO Premium subscribers in September last year, which sadly seems like decades ago. The intro piece, appropriately titled “Introducing MFO’s Portfolio Analysis Tool,” was in response to David’s May 2017 article “Time to put on your big-boy pants and check your investments.” In it he demonstrated a simple method to answer the “how bad could it get?” question. Based on the current funds held in your portfolio, how much pain (aka drawdown, aka Ulcer Index) might you experience in the next downturn?
The Portfolio Analysis tool does this automatically. It enables you to assign allocation weightings to each fund in your portfolio, so that risk and return metrics can be evaluated at the rolled-up portfolio level. Users can define up to 10 portfolios with each portfolio holding up to 25 funds. The portfolios can be saved to the user’s profile. Rolled-up risk and return metrics can be evaluated across 42 different evaluations periods.
This month we’ve added two big enhancements requested by our subscribers. First, users now have option to enter allocation weightings by either percentage or by dollar value. Second, users now have the option to substitute category average returns when a portfolio fund is too young for the desired evaluation period. This second enhancement is invaluable when trying to get a sense of how a fund just a few years old might have behaved during say the Great Financial Crisis (GFC).
David’s portfolio from May 2017 included 11 funds, the youngest being 60 months through October 2020. Below is the resulting risk and return table from the Portfolio Analysis tool. Over that 60 months, markets experienced the full spectrum of volatility: from nearly zero in 2017 to unprecedented extreme in 2020. But while March 2020 was awful, drawdowns for most funds were not as bad as experienced in GFC through March 2009. At the rolled-up level, David’s moderate risk portfolio experienced about 19% drawdown.
By clicking the “Substitute” button in the enhanced tool, David can now retrieve an estimate of what this portfolio might return and, more importantly for many investors, “how bad might it get” during a GFC like downturn. Below shows the updated results for the GFC evaluation period. Note that six funds were substituted with category average returns, since they were not around last decade. The estimate indicates this same portfolio might be down about 34% and its risk (aka volatility) a notch higher than first appears.
It’s worth noting that the tool uses the actual category averages of the monthly returns to compute correlation sensitive metrics like MAXDD. Trying to average MAXDD at the portfolio level can be misleading when the funds are uncorrelated.
In addition to these enhancements to the Portfolio Analysis tool, we’ve also added five new evaluation periods to the main MultiSearch tool, bringing the total to 64, including lifetime, year-to-date, multi-year and multi-month, plus full, down, and up market cycles for all risk and performance metrics.
Please enjoy the new features!