Portfolio Charts

[Seppia]

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]

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]

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]

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.

[Tyler9000]

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.

[Tyler9000]

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.

[Tyler9000]

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?

[Tyler9000]

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]

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

[Tyler9000]

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]

Will definitely do a thorough visit tomorrow, thanks

[Seppia]

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]

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]

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]

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. 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]

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

[Kipling]

@Seppia- the UK bias towards UK listed companies has much more recent historical reasons than that. As so often, lurking in the background there is a tax reason. Remember most peoples' pensions investments were invested though funds until very very recently. Until 1997 UK pension fund vehicles could get cash refunds on otherwise unusable (given that pension funds didn't pay tax) dividend tax credits from UK shares. This led them to be very significantly overweight UK equities, as opposed to ROW. Unfortunately this advantage was a significant cash cost to the UK treasury and the new Labour government decided to remove it (the removal of this perk was known as 'Brown's raid on pension pots'). It was also an impermissible restriction on the freedom of movement of capital from an EU law POV so had to go in any event. (See, a whole bunch of tax cases.) It is notable that the proportion of UK equities held by UK pensions funds roughly halved in the decade afterwards, going from 2/3 to 1/3. I agree that there is still at an individual investing level a slight illogical home bias, but that is mainly due to (i) familiarity ("I buy their goods, I buy their shares"); (ii) currency risk fears; (iii) the risk of tax complications; and not to do with the Imperial past.

[Tyler9000]

I saw a comment about Portfolio Charts donations around the forum today, and for those following along you may not be aware that I finally have an option in place for that. I'm not going to link it because I don't want to create any confusion about my motivations for posting here, but if you're truly interested it shouldn't be too hard to find.

All money aside, thanks for many years of support and inspiration!

[slowtraveler]

Hey Tyler, I've really appreciated the Portfolio Charts site but I have found something confusing when comparing the results to CFireSim. Inputting gold to complement equities into CFireSim seems to always lower the swr, whereas 10-20% gold increases the withdrawal rate in Portfolio Charts.

Is this a result of different data, different time frames, different calculation methodology, or something else?

Thank you Tyler.

[Tyler9000]

I can't speak to CFireSim's methodology, but when it comes to gold I imagine the discrepancy is largely due to the fact that the gold market fundamentally changed quite a bit over the years.

1) The Bretton Woods agreement pegged most of the major global currencies to gold between 1944 and 1971. Think of it as basically eliminating gold's diversification benefits by government fiat.

2) Gold was illegal for individuals to hold in the US in any investable form between 1934 and 1964.

The combined effect is that any portfolio backtested with gold prior to 1970 or so (CFireSim starts in 1871, PC starts in 1970) doesn't really model the effect of gold as it works today on an asset allocation. It actually models the effect of taking that much money out of the market for decades at a time. So it doesn't surprise me that CFireSim suggests that gold lowers SWRs, but I personally wouldn't put much stock into it because we live in a completely different economic system than CFireSim studies.