Portfolio Charts

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Seppia
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Re: Portfolio Charts

Post by Seppia » Wed Apr 24, 2019 12:00 pm

Tyler9000 wrote:
Wed Apr 24, 2019 10:41 am
The calculators don't have a pure EMU stock option, but they do have Europe (including a few non-Euro countries like the UK) which is pretty close.
For what is worth, regarding stocks I think this here is the most useful approach.
Uk + Switzerland represent a huge chunk of Europe stock market cap (40-45%), and if you look at the evolution of assets under management in say VEUR or EXSA you can tell this approach is “winning” vs strictly Euro area stock indexes.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Apr 24, 2019 12:14 pm

Seppia wrote:
Wed Apr 24, 2019 11:42 am
To simplify:
No one in Italy buys exclusively German bonds
Most people in Italy buy exclusively Italian government bonds, but we are talking about senior people that will probably never visit your site
I would guess most people visiting your site from Italy would buy a basket of Euro bonds via an index fund.
Thanks! That helps a lot... even if it creates headaches.

So here's my issue. I can calculate Eurozone bonds from published EU interest rates since about 2004 (although the variety of credit ratings also make that a little nuanced), but all of my tools require data histories going back to 1970. I won't bore you with the details, but my normal "replacement asset" method won't work in this case and there's not enough data to simulate my own index pre-Euro using the same methodology as modern bond funds. German Bunds seem like the best alternative, but I understand that's not ideal. So my options seem to be:

1) Show German Bunds for Italian investors (or maybe even US Treasuries, as I'm surprised how many US treasury fund options there are for European investors on Justetf) even if most Italians probably don't invest that way. But if Italians are currently using my Germany setting, it's at least a step in the right direction with Italian stocks, inflation, and exchange rates.
2) Show broad Euro data backfilled with something like German Bunds that changes the data methodology pre-Euro and may not be historically accurate. That said, if I stick to AAA-rated Euro bond data it naturally tracks German bonds pretty closely.
3) Show no European data other than for countries with long public bond histories (apparently just Germany).

This is a tricky one. Any other inputs, ideas, or data sources are always welcome.

@Jacob -- Absolutely. The calculators already translate all numbers not only to local currency but also to real returns using local inflation.

Seppia
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Re: Portfolio Charts

Post by Seppia » Wed Apr 24, 2019 12:36 pm

I would use German bunds and inflation data for the pre-euro data in Europe.
This may not be a scientifically sound approach but it’s better to be approximately right VS precisely wrong.
The reason is simple: most euro rules have been built based on the German approach* and very unsurprisingly we have converged towards a German-like system since the adoption of the euro.
So, for an Italian investor investing in 2019, making a decision based on 1980s data (when inflation in Italy was regularly in the high teens and bonds were yielding double digits) would be very risky.
With the euro we are playing a completely different sport VS back when we had the lira: a sport with mainly German rules and that looks a lot like Germany pre-euro

*german approach means, to put it simply, policies that aim at having low and stable inflation, and containment of debts and deficits. This approach is where the euro rules such as the maximum limit of 3% deficit/GDP come from.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Apr 24, 2019 1:49 pm

Yeah, I've thought about simulating European bonds back to 1970 by using German Bund returns and bypassing the pre-Euro exchange rates between Euro countries. That's simple enough, but your point about inflation is a lot more profound. The local economy and local inflation are not completely independent variables, so that could mess with way more than just bonds. If Europe is converging towards the German model and only German stats matter, then at some point it makes sense just to keep things like they are with German assets only.

Hmm... Lots to think about.

bigato
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Re: Portfolio Charts

Post by bigato » Wed Apr 24, 2019 1:56 pm

Maybe it is time to think about how to get over that limitation of only being able to use data if it goes back to 1970?

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Apr 24, 2019 2:05 pm

Yep -- I've already done that. For any current data that doesn't go back to 1970, I replace it with a similar-but-different asset and use an error measurement system that calculates how well the replacement data tracks the desired series in overlapping years. See "Verified vs. Estimated Returns" here: https://portfoliocharts.com/methodology/

The issue with Euro bonds is that the monetary system completely changed with the introduction of the Euro in a way that forces European bonds to track each other way more tightly than they ever did before. So my error measurements will always say the data match between the bonds of any European country looks great when I know full well anything before the EU was a completely different ballgame.

Worst case, I can perhaps create a few specialized EU-only tools that only work after 2000. I wouldn't be able to do things like Withdrawal Rates (as excluding so many bad years that set the WRs would be highly misleading), but stuff like the Heat Map would work fine.

bigato
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Re: Portfolio Charts

Post by bigato » Wed Apr 24, 2019 2:21 pm

I was thinking more along the lines of it reflecting history as it occurred, not trying to simulate how it should have been. Have the tool somehow reflect how a real investor could have done. For example, if a certain kind of asset started existing in say, 2010 (bitcoin?), you could add it to the portfolio and have at least the simulation for the 9 years since (with disclaimers and all). Or a simulation could start in 1960 with the assets that existed back then (and for which you have data), and then that simulation adds say, bitcoin in 2010, and the data is calculated up to 2019. You could be also more country agnostic, specially nowadays when it is easy for me, in Brazil, to buy an ETF that reflects SP500.

I don't know how hard it would be to fit these ideas in the current model, but I may be willing to even give some help in the programming side if it comes down to that - because that would be personally helpful to me in more than one way. One of them would obviously be the resulting tool itself, but I also have some ideas in mind for a personal project (not public facing) that involves simulating strategies over historical data - and any experience helping with this tool would give me useful domain knowledge. What I don't want to do though, is anything that involves user interface.

By the way, I have no personal interest in simulating bitcoin, it was just an easy example of a recent "asset" if you want to call it that.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Apr 24, 2019 2:53 pm

Ah -- got it. That's actually pretty similar to the way it functionally works now even if I personally prioritize things that can be reasonably modeled a ways back in time. Your method of introducing assets just disposes of the error measurement system and does the best it can with the assets available at the time, and I can appreciate that approach. Now that I've started to hit a few data roadblocks it's certainly worth thinking about.

BTW, a good use for that would be TIPS. They're impossible to model before they existed but they're certainly popular now.

I have the programming covered for now, but thanks for the offer. Feel free to PM me if you ever need tips on the data methodology side.

bigato
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Re: Portfolio Charts

Post by bigato » Wed Apr 24, 2019 3:53 pm

Thanks!

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Thu Apr 25, 2019 2:37 pm

bigato wrote:
Wed Apr 24, 2019 2:21 pm
I was thinking more along the lines of it reflecting history as it occurred, not trying to simulate how it should have been. Have the tool somehow reflect how a real investor could have done.
The more I think about this, the more I like it. Before the EU, the best alternative for EMU government bonds was not a theoretical modern index replication under a non-existent monetary system but the next best option that a like-minded investor at the time might have chosen. So instead of a high-grade EMU government bond index, a reasonable investor might have purchased an equal-weighted basket of German, French, and perhaps UK bonds (why exclude them before the EU was a thing?) and simply dealt with any exchange rate issues. Why those 3? They make up the vast majority of European bond market share among countries with high credit ratings.

So for Italy, I could theoretically offer a choice of three different bond options: World, Europe, and USA. WLD and EUR would backfill when necessary with a "reasonable investable alternative" collection of a handful of the most important countries. And I'd translate everything to Italian inflation and also to Lira before the Euro. I understand the concern about old Italian inflation not being realistic anymore, but that's why I like to offer multiple countries to test ideas out of sample.

Does that make sense?

bigato
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Re: Portfolio Charts

Post by bigato » Fri Apr 26, 2019 6:41 am

I think it’s better to offer the individual real options that were available at the time instead of trying to make decisions for how a theoretical investor should have done.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Fri Apr 26, 2019 8:59 am

I hear ya. My main goal is to provide historical context for portfolio ideas, and since the financial world is not static there will always be a bit of nuance in how a portfolio's design intent is interpreted over time. Even among smart data-driven people, some just blindly assume that the US S&P500 can represent any stock while others are so particular that they refuse to look at numbers before the invention of their specific ETF ticker. I personally think both extremes are shortsighted, so I work hard to offer the most accurate and useful long-run information possible to help people make educated choices.

Sometimes you do hit a gray area, like identifying a reasonable interpretation of the idea of "buying 40% European bonds" before the EU existed. That's why I value forums like this to help understand the investor mindset rather than just look at a giant pile of data in a vacuum.

jennypenny
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Re: Portfolio Charts

Post by jennypenny » Tue Jul 16, 2019 6:56 am

Tyler has made some cool updates to PC if you haven't visited lately.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Tue Jul 16, 2019 4:27 pm

Thanks for noticing. :) Upgrading the account to unlock the full suite of plugins has opened the floodgates of interface possibilities, and I've definitely been doing a lot of experimentation lately.

Seppia
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Re: Portfolio Charts

Post by Seppia » Tue Jul 16, 2019 4:42 pm

Will definitely do a thorough visit tomorrow, thanks

Seppia
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Re: Portfolio Charts

Post by Seppia » Wed Jul 17, 2019 2:05 am

Overall I find the "My Portfolio" builder less intuitive compared to the prior one, mostly because of all the acronyms.
Also, did "Europe", "Japan" disappear as an asset class? I find their absence to be a pretty damaging one.

If I select "germany" as a domestic, I can only pick stocks:

German stock market
World ex-germany
Emerging

It would be cooler to be able to select:

Europe
Emerging
Japan
Developed Asia ex-Japan

It lacks a flexibilty that it had before, was this a consciuos choice?

Please don't take this badly Tyler, I am one of the most enthousiastic supporters of your amazing site and will forever be grateful for what you did/do.

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Jul 17, 2019 10:25 am

I love your feedback, Seppia. I'm pretty sure you're largely responsible for my Italian following, so I very much value your input.

I did abbreviate a lot of the asset descriptions in the tools to save space. It's true that it makes it less intuitive for newcomers, but it also makes it a lot cleaner and less repetitive once you get the hang of it. I compensated a bit by making all of the asset acronyms clickable, so be sure to follow the link if you ever get confused.

Regarding your comments on the asset choices, it comes down to prioritizing certain features to meet the most important user needs. For reference, the #1 visited page on the site is the Portfolios page and about half the traffic (and growing) is from outside the US. Following that quantifiable market feedback, quickly and accurately translating portfolio ideas between countries is a top priority of mine. I discovered a few months ago that my previous way of rolling in regional data as a pseudo-domestic asset was introducing some weird logical errors into portfolio translations, and the resulting setup you see now is all about standardizing things. Long story short, German, World, and Emerging stocks are all that's required to translate every portfolio idea on the site for German investors, and that same domestic/world/em paradigm is very easy to translate to any country. So I cut the overhead and strengthened my foundation.

That said, I do recognize that once you think beyond the ready-made portfolios a few more options in the calculators would be valuable additions for many people like yourself who want more asset choices. I know Canadians love US assets and Germans love European assets, so I'm looking at reintroducing some fixed regional (USA, EUR, JPN) options and I'm still studying pre-EU European bond ideas as well. Hopefully one day I'll also get Italy on the list. It's an ongoing process, so be sure to continue checking in. ;)

Seppia
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Re: Portfolio Charts

Post by Seppia » Wed Jul 17, 2019 1:44 pm

Thanks for your reply Tyler.
From an Italian perspective, I can tell you for sure that many people below 50yo consider "europe" as the "domestic" stock market.
I am pretty comfortable saying that it is the case for many Europeans, with some notable exceptions being maybe the Brits and the Swiss, who tend to have a stronger country bias.

In terms of stock markets that should be available as a standalone regardless of what one selects as "domestic", I would prioritize:

1- USA - It's almost half the planet's market cap and also has all the fancy stocks young people like
2- Europe - As a whole it's #2. I would keep UK and Switzerland in there as the largest companies, even if listed in local currencies, tend to move as if they were priced in euros. IE Royal Dutch, Brtish american Tobacco etc, when the pound goes down VS all other currencies, they tend to rise in value to compensate as those large corps make most of their money outside their home market. Same for switzerland with Nestle etc.
So the currency risk Germany/UK is much lower than it is with Germany/USA for example
3 - Japan

Tyler9000
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Re: Portfolio Charts

Post by Tyler9000 » Wed Jul 17, 2019 2:07 pm

Seppia wrote:
Wed Jul 17, 2019 1:44 pm
From an Italian perspective, I can tell you for sure that many people below 50yo consider "europe" as the "domestic" stock market.
I am pretty comfortable saying that it is the case for many Europeans, with some notable exceptions being maybe the Brits and the Swiss, who tend to have a stronger country bias.
It's funny you say that, as I got feedback from UK investors who don't see Europe as domestic at all! Designing one tool for multiple customer bases without making it so complex that nobody likes it is a lot harder than it sounds. :P But regardless of the classification I can see how it's helpful.

Thanks for the priority list and for the explanation in #2. That pretty much aligns with what I expected, which is a good sign I'm on the right track. I'll see what I can do.

Seppia
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Re: Portfolio Charts

Post by Seppia » Wed Jul 17, 2019 4:19 pm

Yes the Brits do have a country bias that’s similar to the Americans’.
Big difference is the USA is 50% of the stock market while the UK... is not :)
I would guess the reason is mostly historical, as the UK stock market was the largest by far IIRC in the beginning of the twentieth century.
Habits are hard to break

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