Portfolio Allocation Optimizer FAQ

1. Does this site provide investment advice?

   Answer: No. This site provides investment tools to allow you to research historical performance of portfolios so that you can make a self directed investment decision.

2. What are the web browser requirements for this site? Things don't seem to be working...

   This site has primarily developed with Firefox 3. It has been shown to work in Internet Explorer 8, Safari, and Chrome (Chrome is very fast). If you think your browser is not processing the site correctly, the easiest solution is to download a better browser.

3. Does this site require JavaScript to be turned on in my browser?

   Yes, please ensure that it is enabled.

4. What is so special about this site, aren't there other tools that do this same thing?

   We have data that shows that RiskCog creates less risky portfolios than any other method we have tested so far. This is possible because RiskCog is based on better science and engineering principles. If you know of a portfolio construction methodology that you believe to be better please contact us, we would love to do a comparison article.

5. How can I view the key for the portfolio graph?

   Move your mouse over the graph to bring up the key.

6. Are the example portfolios rebalanced?

   Answer: Yes, portfolios are rebalanced annually. The portfolio assumes $1 invested at the beginning of 1972, and rebalanced annually to the target allocation.

7. Why does My Portfolio not match the MKT-TSM when they are the only ones displayed?

   Answer: the difference is the expense ratio paid each year on a portfolio that holds a fund representing the TSM.

8. What does CAGR mean?

   Answer: Compound Annual Growth Rate. This is the equivalent compounding rate for the portfolio. (This acronym can be pronounced "cayjer".)

9. How do I use the information output by this portfolio tool?

   Answer: You can use the historical worst year for a portfolio you enter to understand what might happen in future market crises. The optimized allocations can be used as suggestions for how you might consider adjusting your current portfolio to achieve benefits from diversification.

10. How do I save a portfolio or send someone a link?

    Answer: You can bookmark or copy the URL of the page (including the piece that looks like #5890e9d5f80ic) in order to return to the portfolio you have created. This URL can also be sent to another person so that they can see the same portfolio.

11. Gold seems to show up in large amounts in portfolios I generate, why is that?

    Gold is an asset that has low correlation to the stock market. Gold does well during inflation and market shocks that are really bad for other asset classes, so it is a potent diversifier.

12. The optimizer is giving me way more/less allocation to asset X than I want than I am comfortable with, what should I do?

    Answer: Just enter the amount you are comfortable with in the text entry box to the left of the drop-down menu, and re-run the optimization. This step will lock that asset allocation to the percentage you select.

13. Are the values displayed the published yearly values or are they adjusted for inflation using some index?

    Answer: the numbers are based on nominal returns, as reported by the fund or index in question and not adjusted for inflation. The expense ratio for the example fund representing that asset class is subtracted from the returns each year.

14. Sometimes I get different portfolios back for the same set of inputs. Why?

    Answer: The optimizer uses random numbers to arrive at its solution so if there are multiple good solutions, any of those may be selected.

15. What do you mean by "optimal"; what is your convergence criteria etc?

    Short Answer: A heuristic is used to determine how long the optimizer should run. Shorter runs are used for smaller numbers of assets, while more asset selections take a longer time. A trade off was chosen between providing results quickly and finding the absolute global maxima.

16. When I enter portfolio fractions that total more than 100 there is no warning or flag?

    Answer: The code just normalizes the numbers based on the total sum of entries if the total goes over 100. This would allow you to enter values in dollar amounts without calculating percentages beforehand. When you try to run the optimizer you may get a warning message if it can't make sense of your entries since that step does require sane percentages.

17. How to set minimum allocation for an asset class, but allow the optimizer to use more if needed?

    Answer: Use two drop down boxes with the same asset listed. Put the minimum in one box and leave the other box empty.

18. Are these optimized portfolios over-fitted to historical data rendering them useless for predicting the future?

    Safe Answer: Yes.

    Nuanced Answer: Over-fitting to historical data is a real danger to watch out for, however we think some long standing truths can be found by examining history. The optimization methodology is based on the theory that the worst market crises from the past will repeat again in different ways. Instead of assuming that asset classes have low correlation as in normal markets, the optimizer basically just looks at circumstances in history where the correlations among asset classes rose in the worst possible way.

    When a portfolio is generated it is stressed against market data from years like 1973, 1974, 1981, 1990, 1994, 1998, 2001, and yes 2008. 2008 was a rough market, but sometimes the most challenging markets for the optimizer are found earlier in the dataset. A portfolio that performs well in earlier crises tend to behave well in subsequent panics when compared to allocations that blew up in previous panics.

19. Do you have any examples of out-of-sample trials of portfolios developed with this optimization approach?

    Answer: There is a comparison of optimized portfolios to some popular lazy portfolios.