In one of the previous posts, we introduced the Alpholio™ app for Android. This post is the fifth one in a series covering the app’s services in more detail.
The Portfolio service produces charts of total returns for portfolios composed of multiple securities and rebalanced with a specified frequency. (To better understand the importance of using total returns as opposed to price returns, please refer to the description of the app’s Total Return service.)
To access the service, start the app, open the navigation drawer and tap the Portfolio item:
This will open a new screen, on which you can enter inputs for the chart. To expand the Dates, Return Frequency and Rebalance Frequency sections, simply tap each section header:
You can enter up to 20 portfolio positions by specifying a ticker and percentage weight for each. The weight determines the value of the position relative to the total value of the portfolio. For example, if the portfolio is worth $10,000 and a position has a weight of 25%, then the position’s value is $2,500. Position weights in a portfolio always add up to 100%.
The default positions are VTI (Vanguard Total Stock Market ETF) at 40%, EFA (iShares MSCI EAFE ETF) at 20%, and AGG (iShares Core U.S. Aggregate Bond ETF) at 40%. This is effectively a balanced 60/40 portfolio with one-third (i.e. 20% out of 60%) of the equity part in foreign securities.
To change a position’s ticker, tap the corresponding field and use the pop-up keyboard to edit it. (If you need to find the ticker based on other information, use the Security Lookup service of the app.)
To change a position weight, tap and drag the thumb of the corresponding seek bar until you see the desired percentage displayed above the bar. When you finish, weights of all other positions in the portfolio will automatically recalculate to add up to 100% (due to the seek bar resolution, there may be a rounding error of up to 1%). If you do not want the weight of a particular position to change, tap a corresponding Fix check box. If only one position remains unfixed, its weight cannot be changed.
To delete a position, tap its Del button; you will not be able to remove the last remaining position. When a position with non-zero weight is removed, its weight is distributed among the remaining positions according to their weights. To add a position, tap the Add Position button at the bottom of the list, then enter the new position’s ticker and set its weight.
To modify either the From or To date, tap its corresponding button. This will pop up a standard date selection dialog. The From date must chronologically precede the To date.
To select a different return frequency, tap the corresponding radio button. Generally, monthly returns will provide a smoother return plot than weekly or daily ones.
To choose a rebalance frequency, expand the Rebalance Frequency section and tap the corresponding radio button:
Portfolio rebalancing involves adjusting positions to bring their weights to their original specification. The service assumes that trading costs are negligibly small compared to the position value. This is, for example, the case with no-transaction-fee ETFs at discount brokerages.
The frequency of rebalancing cannot be higher than the frequency of returns. For example, with monthly returns, portfolio can be rebalanced monthly, quarterly or semi-annually (i.e. every six months), but not daily or weekly. If you make both frequencies the same then the portfolio weights will effectively be kept constant (disregarding weight fluctuations in between rebalancing events).
After you specify all parameters, tap the Analyze Portfolio button. If any of your inputs are invalid, you will see a brief pop-up warning. If all settings are acceptable, they will be saved on the device for subsequent use. Please note that to generate the chart, your device must be connected to the Internet.
When the app obtains and processes the data, you should see the following screen:
The first thing you may notice is that the chart begins in October 2003 and not January 2000 that was specified as the From date. That is because the inception date of AGG was in September 2003 and the first full month of returns for this ETF was the following month. The app automatically selected the largest possible date range for the analysis.
To zoom in on a portion of the chart, tap the + button or use a spread gesture. To scroll a zoomed-in chart horizontally or vertically, use a corresponding swipe gesture. To zoom out, tap the – button or use a pinch gesture. To immediately restore the chart to its original view, tap the 1:1 button.
Below the chart, there is a Statistics section that can be collapsed and expanded by tapping its header. You can see that the portfolio had an annualized return of about 7.4% with an annualized standard deviation or returns of about 9.6%. The portfolio generated a modest amount of alpha but its beta was significantly lower than that of the market (by definition, equal to one). The Sharpe ratio of the portfolio was 0.64 and the maximum drawdown from the peak in October 2007 to the trough in March 2008 was about 34%.