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mYCharts - June 3, 2020

Accepting an Imperfect Portfolio with Nick Maggiulli



Q: Tell us about your role at Ritholtz Wealth Management and your “Of Dollars And Data” blog. How do you hope to educate investors about the importance of data when making investment decisions?

A: I maintain my blog at “Of Dollars And Data” to help people make better financial decisions using the best information available. Data is useful in this regard because it provides some guidance about what might happen in the future. Of course, the future is never like the past, but that doesn’t mean we cannot learn from it.  

At Ritholtz Wealth Management, I am responsible for the management and analysis of the firm’s data. This includes lead flow, customer relationship management, and research for the Investment Committee.

Q: The coronavirus crisis has taught investors the importance of portfolio construction and managing downside risk. How do you think portfolios will change as a result?

A: I expect more investors will include higher allocations to tail risk funds (or similar products using sophisticated instruments like options to outperform when the market crashes), probably to their own peril. We are very good at fighting the last war. Unfortunately, the next financial shock is unlikely to be like this one. Therefore, I anticipate we’ll see more focus on downside protection going forward. I am skeptical whether this approach will make investors better off in the long run, as they may miss out on growth in the market.

Q: The graphic above shows the risks of different allocation-based portfolios, and why investors should be diversified. What should advisors take away from your recent blog on this topic?

A: In this post, I compared the performance of a handful of portfolios, each representing different levels of risk. They were the Permanent Portfolio (25% stocks, 25% bonds, 25% gold, 25% cash), a 60/40 U.S. stock/bond portfolio, a 80/20 U.S. stock/bond portfolio, and the S&P 500 (100% U.S. stock portfolio).

The point of this exercise was to determine which portfolio might be right for you going forward in terms of risk and return. The main takeaway is that whatever portfolio you choose involves trade-offs. 

If you take less risk, you (generally) get less reward. But, more importantly, whatever portfolio you pick is likely to look “less than optimal” in hindsight. Even when you expect a portfolio to behave in a certain way in the future, there is nothing saying that markets will comply.  

The better you are at accepting that your portfolio will never be perfect, the more likely you are to stick to your plan and succeed. 

Q: How does YCharts help you in your blogging and market analysis? Are there any standout tools within the platform that you are particularly fond of?

A: While I’m most excited about the potential of Model Portfolios, I have enjoyed using the Timeseries Analysis tool quite a bit because it allows me to grab lots of data very quickly. For example, the ability to get market cap information for every stock in the S&P 500 in less than 2 minutes has been incredibly convenient and has saved me a lot of time in my writing. 

Q: As someone who loves working with data, what do you see as the most important metric for evaluating or comparing investments?

A: The options for comparing investment performance are endless. You have Sharpe Ratios, standard deviations, downside deviations, maximum drawdowns, long-term returns, and so much more that you can compare. 

However, the only metric that matters is whether your money is allowing you to live the life that you truly want. If so, then your portfolio is great. If not, then make the appropriate changes. Though I love data, sometimes the best metrics can’t be quantified.

Nick Maggiulli

Ritholtz Wealth Management

Data Scientist



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