InvestorCraft has a variety of powerful tools to help you to achieve a better understanding
of an investment portfolio, whether it be one consisting of your current holdings
or one you are considering. The best way to get started using this site is
to use one of the portfolio analysis tools. Doing so will familiarize you with common
steps, like building a portfolio of securities, analyzing it, and saving it for
future reference. The most basic tool is the Correlation
Analysis.
It helps you to understand the degree of
diversification of a portfolio by looking at how strongly correlated the price
movements of each pair of assets has
been over a historical time period. To use this tool, select the
Correlation Analysis
link. The tool will walk you through the steps of picking a set of securities
and a time range for the analysis. Detailed instructions on using and understanding
the Correlation Analysis are available in the
Correlation Guide.
At the end of the Correlation Analysis, you can choose to
save your portfolio for future reference. To do so, you must
register
on InvestorCraft so that your portfolio can be associated with your
user name.
After the Correlation Analysis, a good next step is to
execute the
Efficient Frontier analysis.
Based on the concepts of modern portfolio theory introduced by noble-prizing
winning Professor Harry Markowitz, the efficient frontier is a mathematical optimizer.
The efficient frontier analyzes the
mix of assets in a portfolio and determines an upward sloping curve (or frontier) that gives
the highest expected return for any given level of risk. It looks at
historical price behavior to do so, so
the results it reports are based on past performance. Just like in the correlation analysis, you
select your securities and time period for the analysis.
The tool will analyze
the past price movements
of securities and determine an optimum weighting of
securities in the portfolio. This optimum is based on the objective
of maximizing the reward-to-risk ratio. Because this tool is a pure mathematical
optimizer, the optimum weights can sometimes be extreme, including
short-selling (indicated by negative weights) of certain securities. If you want
to limit the percent allocated to any single security to a certain range, you
can do so by entering allowed minimum and maximums. If you do so, an adjusted portfolio will
be calculated that limits the asset weights based on your limits. Remember
that the suggested asset weightings given by this tool are based on what would have
optimized the reward/risk ratio for past history, and that past performance is no guarantee of future performance.
The
Sharpe Allocator
suggests asset weights based on a different set of mathematical formulas and offers a useful comparison to the Efficient Frontier.
The Sharpe Allocator uses a much simpler algorithm to calculate these weights, based on the Sharpe Ratio, which
is a ratio of reward to risk.
It simply calculates the Sharpe Ratio for each security and then allocates the
securities proportionally according to their Sharpe Ratio score. This is not a
pure optimizer since it does not attempt to optimize an overall portfolio metric like the Efficient Frontier. It simply scores each security based on its past return/reward ratio
and rewards the higher scoring ones proportionally.
Each of the portfolio analysis tools allows you to save the
results for future reference.
This allows you to save your portfolio at one point in time, and then track
its actual performance against the modeled results over time. Results are updated at
the end of each month. You can save multiple portfolios, allowing you to build
different "experimental" portfolios and compare their performance over time.
Once you have built a portfolio in InvestorCraft, you can enter it into the
site’s
portfolio competition,
which allows investors to match their
portfolio-building skills against those of other investors. This is a fun way
to develop your portfolio building skills and to see how others have built
strong performing portfolios.
Finally, the
Investorcraft forums
provide a meeting place
in which investors can share information with others. So visit the forums and read information or post questions to other users of
the site. This community site offers a great place for knowledge sharing on a
variety of investing topics.