On the Internet: Portfolio Optimization Sites
by CI Staff
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Portfolio Optimization Sites
Modern portfolio theory (MPT)—introduced in the 1950s by Harry Markowitz—focuses on a portfolio of assets and the relationship of the risk and return of individual assets. It illustrates that through the diversification of combining risky assets in a portfolio, it is possible to achieve higher returns without taking on additional risk. Markowitz also introduced the concept of an efficient portfolio, which minimized the risk for a given level of expected return, or maximized expected return for a given level of risk. Given the importance of these issues for investors, we present current sources for asset allocation advice found on the Web.
The FinPortfolio.com Web site offers a comprehensive array of portfolio planning, analysis, and management tools for both the individual and institutional investor. There are several modules available, including financial planning, asset allocation, asset analysis, portfolio optimization, portfolio risk analysis, and portfolio style analysis.
The sites financial planning, or FinPlan, module is designed to help users chart their financial future. The FinPlan process consists of five steps—plan set-up, asset allocation, portfolio construction, your forecast, and portfolio optimization.
Users begin by identifying their goals and creating a new plan. Plans may consist of multiple future funding needs—retirement, buying a home, paying for college—or a single goal. FinPlan then assists in calculating the amount needed to reach the goal(s). Users enter personal information pertaining to goals, such as retirement age, projected retirement benefits, or number of years until a child begins college.
Once you have established your goals and provided your personal information, FinPlan will propose an Optimal Portfolio—an asset allocation appropriate for your investment goals, investing experience, and risk tolerance. It will also provide wealth projections based upon both expected and worst-case scenarios.
Next, you are asked to enter any current investment portfolio(s) that will be used to meet your financial goals. Using Monte Carlo simulation, FinPlan forecasts the likelihood that your current asset allocation will allow you to achieve your financial goals and compares that with the likelihood of success associated with the optimal asset allocation. Based on this testing, FinPlan presents the optimal asset allocation that provides the maximum amount of return for your specified level of risk. At this point, you can adjust the level of risk you are willing to accept, as well as change additional inputs, and FinPlan will propose a new optimal asset allocation.
FinPortfolios asset selection tool allows you to screen for stocks or mutual funds that have outperformed a specified index—Nasdaq, S&P 500, or Dow Jones—in terms of average return as well as risk-adjusted return. Once the screen is complete, you can select stocks and mutual funds from the list of passing securities to create a portfolio. The site will analyze the portfolio to derive the optimal weightings of each of the selected investments.
Other tools offered by the FinPortfolio site include: portfolio risk analysis tools that measure your portfolios exposure to market risk; portfolio style analysis tools that allow you to systematically analyze the characteristics of your portfolio to ensure it maintains a desirable investment style; and portfolio alerts that offer personalized alerts for monitoring your portfolios.
FinPortfolio.com offers two levels of service for individual investors—basic and premium. Basic service is free and allows users to track up to 50 stocks or funds in one portfolio and perform analysis on up to five stocks or funds. The premium service is $100 per quarter and offers the ability to track as many as 100 stocks or funds per portfolio in up to five portfolios and perform analysis on up to 30 stocks or funds.
The Financial Engines Web site was founded by Nobel Laureate William Sharpe and provides investment advisory services to individual investors, retirement plan providers, employers, and financial institutions.
Individual investors begin by establishing investment goals—desired retirement income, minimum income goal, retirement age, and target risk level. You are also asked to enter your current investment holdings. Based on the information you provide, Financial Engines presents a forecast of the estimated future value of your portfolio and whether you are on track to reach your retirement goals.
Based on this forecast, your current portfolio, and your goals, the service helps you choose appropriate levels of risk, savings, and investments to create a personalized financial strategy. To put this strategy to work, the Financial Engines service develops an Advice Action Kit.
Subscribers to the sites multiple account advice service, which costs $39.95 a quarter, or $149.95 a year, receive a personalized retirement forecast, monitoring of your portfolio, quarterly newsletter, advice on all tax-deferred accounts, forecasts for employee stock options, and forecasts for non-retirement financial goals. The total portfolio advice service, which is $300 per year, adds advice on taxable accounts and advice for non-retirement financial goals. The service is offered for free to current Vanguard clients with $100,000 or more in assets.
The cornerstone of the analysis provided at the RiskGrades Web site is the RiskGrade measure. The RiskGrade is a standardized measure of volatility based upon the volatility of returns for a given financial asset. The variation of an assets price is measured, with more emphasis placed on the most recent price history, and then the assets volatility is compared to the volatility of a basket of global equities. The ratio of these two volatilities is the assets RiskGrade measure. RiskGrades are scaled from zero (for assets such as cash) to values exceeding 1,000. The higher the volatility of returns for an asset, the higher its RiskGrade measure.
Beyond measuring the volatility of individual assets, the RiskGrades Web site can also calculate RiskGrade values for a group of assets held as a portfolio. Using What If analysis, you can see how potential changes in your investments will influence your portfolio. By adding, deleting, or adjusting the amount you own of an asset, the What If analysis allows you to view the impact of the change(s) on your portfolios risk profile.
The RiskGrade Web site is free to registered users.
ValuEngine.com is a stock valuation, investment advisory and forecasting service for individual investors. The ValuEngine Portfolio Advisor enables you to specify various portfolio objectives such as maximizing the chance of meeting or exceeding an investment target, minimizing the chance of loss, or both. Choosing the first option will prompt Portfolio Advisor to create an aggressive, risky portfolio. Choosing the second option will prompt Portfolio Advisor to search for a conservative mix of stocks that will seek to preserve capital. Choosing the third option will prompt Portfolio Advisor to create a balanced portfolio that will seek to both maximize potential gains and minimize potential losses.
Once you specify an investment objective, Portfolio Advisor utilizes its forecasting models to estimate future returns for the individual stocks in your portfolio. Thousands of possible capital allocation plans distributed across the stocks of your choice are then examined. From the results of these simulations, Portfolio Advisor identifies and displays the most favorable stock allocation for your portfolio. Additionally, Portfolio Advisor will inform you of the exact number of shares to buy or sell of each stock, depending on your chosen goal.
Access to ValuEngine.coms Portfolio Advisor costs $24.95 per month.