When investing in stocks and bonds, it is important to take a long-term perspective. We’ve all heard that phrase. A new tool called PortfolioCharts.com lets you create charts that make it easier to visualize the relationship between returns and holding periods. Created by a fellow named Tyler, found via The Reformed Broker.

With the Pixel chart, you can customize any asset allocation and see that portfolio mix’s returns over a multitude of timeframes. Here’s the chart for The Swensen Portfolio, which is the closest “lazy portfolio” to my personal portfolio – 30% US Total, 15% Foreign Developed, 5% Emerging Market, 20 US REIT, 15% 5-Year Treasuries, 15% TIPS.

You can see that depending on your starting year, the returns over the next 1-9 year period could be pretty rough. But as long as you held for 10 years or more, you always got a positive real return above inflation. You can also see that the often-promised 5% real returns aren’t always guaranteed, although historically if you held on for 20+ years your odds were pretty good.

You may recall a similar style of chart from the NYT and Crestmont Research which includes additional data going back to 1920:

My favorite style is the Funnel chart:

The Funnel chart shows the changing uncertainty of compound annual growth rates over time. This demonstrates how long you may need to hold a portfolio to experience the average long-term returns it advertises. It also provides a nice snapshot of the range of 1-year volatility.

Here’s the Funnel for the same Swensen Portfolio:

The funnel chart also supports the notion – in an even simpler way – that if you can take a long-term perspective, your risk of losing money should decrease. Here’s a similar chart from the classic investing book A Random Walk Down Wall Street that was one of my early blog posts:

Finally, the Hurricane chart allows you to simulate what would have happened to your portfolio balance if you made annual withdrawals, such as in a retirement scenario.

Warren Buffett is another famous supporter of taking the long-term view. From a recent CNBC interview:

Buffett, who looks to buy stocks or business for their long-term prospects, said recent weakness in the market does not concern him.

“Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years from now,” he said, adding that’s why he does not try to time the market.

Hopefully for those investors with a long runway ahead of them, this new tool will help you view your portfolio in a more patient manner. I’ll try to remember it when the next market panic arrives.

In the current environment of historically-high US stock valuations and historically-low interest rates, there is a lot of discussion about what investors should expect in regards to future returns. Predictions are a dime a dozen, but some are better supported than others. Research Affiliates has interactive Expected Returns tool where they freely share both their forecasts and detailed methodology. For example, here is a PDF of their equities methodology.

1st Quarter 2015 Equities 10-Year Forecast. Currently, their forecast for equities predicts that US Large-Cap and US Small-Cap stocks will have expected real (inflation-adjusted) returns of below 1% annually. Developed European and Asian Country stocks (MSCI EAFE) have significantly higher numbers, while Emerging Markets as a whole offer the best risk/return ratio (Sharpe ratio). I’m not into single-country bets, but it appears Russia is the one to take if you have a high appetite for risk.

1st Quarter 2015 Fixed Income 10-Year Forecast. Currently, their forecast for fixed income predicts that both long and short US Treasuries will have expected real (inflation-adjusted) returns of basically zero. You might get under 1% real with a broad US bond fund like AGG or BND, or reach for a little more return with a high-yield junk bond fund but with roughly the same Sharpe ratio. The gambler’s choice appears to be Emerging Markets currencies (EM money market funds), which they predict will appreciate relative to the US dollar in the next decade. This is followed by Emerging Market bonds issued in local currency.

I like reading the theories and fundamental arguments for these forecasts, and consider the numbers as part of the big picture but not necessarily something to act on directly. I also keep track of other forecasts, including the follow which were previously mentioned on this blog – Jeremy Grantham / GMO 7-Year Forecasts (free registration required) and the Rick Ferri / Portfolio Solutions 30-Year Forecasts. The most recent GMO numbers also give the expected-returns edge to Emerging Markets in both the stocks and bond worlds (risk is not directly assessed).

Updated and revised for 2014. Some of you may be wondering how well your specific portfolio performed last year (or over any specific period of time). Let’s say you started the year with $10,000 and put in another $5,000 through 10 different deposits spaced throughout the year, and ended up with $16,000. What was your rate of return? Your main goal is simply to separate the effect of new deposits (or withdrawals) and your actual return from investments.

Figuring out your exact personal rate of return requires you to know the exact dates of all your deposits and withdrawals, along with a financial calculator or spreadsheet program with an IRR function (example here). However, for a quick and simple estimate of your returns, try this calculator instead:

Instructions

1. Get your initial balance. This is probably from your brokerage statements. Try January of last year.
2. Tally up any deposits or withdrawals. For example, let’s say you know you put $3,000 in your Roth IRA and also 5% of your $40,000 salary into a 401(k). That would be $3,000 + $2,000 = $5,000. That’s it, you don’t need to worry about looking up the specific dates and amounts.
3. Get your final balance. Your December statement is probably available already.
4. Find the time elapsed (in years) between your initial and final balances.
5. Hit Calculate. An estimate of your annualized return is instantly given.

How Accurate Is This Estimate?
The calculator assumes that the inflows and outflows are spread evenly around the middle of the year. I originally saw this method in the book The Four Pillars of Investing (review). However, unless the deposits and withdrawals are very large as compared to the initial balance, the estimates are actually pretty good.

For example, let’s say that you start with $100,000 on 1/1/13, and end up with $120,000 on 1/1/14. If you had net deposits of $10,000 during the year, the calculator above would estimate your return at 9.52%. If the $10,000 was actually deposited all at once on one of these specific days, you would get the following exact returns:

Also check out the rest of my Tools and Calculators.

A lot of people are worrying about inflation or deflation in the future. The most widely used definition of inflation is the Consumer Price Index, which is published monthly by the Bureau of Labor Statistics and is based on a basket of consumer goods using price surveys from cities around the country. This takes a while, so the CPI for December would be published in mid-January.

Professors Roberto Rigobon and Alberto Cavallo at the MIT Sloan School of Management started the Billion Prices Project which, directly pulls data from online retailers from around the world. In the US, the software is tracking 550,000 items from 53 retailers. The best part – since it’s all automated, the numbers are updated daily! The goal is to predict the CPI before they even announce it. You can see from the charts below that the two track reasonably well together.

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If they start to vary widely, which one should be considered inaccurate? Via the NY Times.