Glossary of Terms

Plain-English definitions for the metrics, strategies, and concepts used across PortfolioDB.

Asset Allocation: The mix of asset classes — stocks, bonds, real estate, commodities, and so on — that a portfolio holds. Asset allocation is typically the single biggest driver of long-term returns and risk. Two portfolios with identical assets but different proportions can behave very differently over time.
Asset Class: A broad category of investments that share similar characteristics and tend to move together in the market. The main asset classes tracked on PortfolioDB are equities, fixed income, commodities, real estate (REITs), and alternatives.

Backtesting: Running a portfolio strategy through historical market data to see how it would have performed. All return histories on PortfolioDB are backtested for periods before the relevant ETFs existed, and live data after. Backtested results are illustrative -- they do not guarantee future performance and may reflect decisions that were obvious only in hindsight.
Benchmark: A reference portfolio used to put performance in context. On PortfolioDB, the default benchmark is the US 60/40 Portfolio — 60% US stocks and 40% US bonds — which represents a conventional balanced investor.
Bonds / Fixed Income: Loans made to governments or corporations that pay a fixed rate of interest over time. Bonds are typically less volatile than stocks but offer lower long-term returns. They play a stabilizing role in diversified portfolios, often rising when stocks fall.
Buy and Hold: An investment approach where you build a fixed portfolio and hold it for the long term, rebalancing periodically to restore target weights but never trying to time the market. Most portfolios in the PortfolioDB database are buy-and-hold strategies.

CAGR — Compound Annual Growth Rate: The annualized rate of return that would take a portfolio from its starting value to its ending value over a given period, assuming returns compound continuously. CAGR is the most useful single summary of long-term performance because it smooths out the year-to-year variability. See the Methodology page for how we calculate it.
Commodities: Raw materials and physical goods traded on global markets -- gold, silver, oil, agricultural products, and industrial metals. Commodities can act as an inflation hedge and provide diversification because they often move independently of stocks and bonds. Many portfolios hold commodities through broad ETFs or via a dedicated gold allocation.
Compound Interest: Earning returns on your returns. When investment gains are reinvested rather than withdrawn, the portfolio grows at an accelerating rate over time. All returns on PortfolioDB assume full reinvestment of dividends and income (total returns), which is why the difference between a 6% and an 8% CAGR compounds dramatically over decades.

Diversification: Spreading investments across multiple asset classes, geographies, or strategies so that no single holding dominates performance. The goal is to reduce risk without proportionally reducing expected return. A well-diversified portfolio may hold assets that sometimes move in opposite directions, cushioning losses during market downturns.
Dual Momentum: A strategy developed by Gary Antonacci that combines two momentum signals: relative momentum (which asset class is outperforming peers) and absolute momentum (whether an asset is in an uptrend relative to cash at all). When absolute momentum turns negative, the strategy moves to the safety of short-term bonds or cash. See the GEM Dual Momentum portfolio for an example.

Equities / Stocks: Ownership shares in publicly traded companies. Equities have historically delivered the highest long-term returns of any major asset class but also carry the highest volatility and deepest drawdowns. A heavy equity allocation is appropriate for investors with long time horizons and the temperament to hold through large losses.
ETF — Exchange-Traded Fund: A fund that holds a basket of assets (such as every stock in an index) and trades on an exchange like a single stock. ETFs make it easy to implement diversified portfolio strategies at low cost. Almost every portfolio on PortfolioDB can be built with a small number of broad- market ETFs.

Factor Investing: An approach that tilts a portfolio toward specific characteristics ("factors") -- like small-cap stocks, value stocks, or high-momentum stocks -- that have historically outperformed the broad market over long periods. Factor investing sits between passive index investing and active stock picking. Common factors include size, value, momentum, profitability, and low volatility.

Global Asset Allocation: A portfolio strategy that diversifies broadly across multiple asset classes and geographies -- stocks, bonds, commodities, real estate -- rather than concentrating in a single country or region. The idea is that no one asset class leads forever, so spreading globally smooths returns over time. Examples include the All Weather Portfolio and the Ivy Portfolio.

Index Fund: A fund that tracks a market index -- like the S&P 500 or the global bond market -- rather than trying to pick individual winners. Index funds offer broad diversification at very low cost. They are the building blocks of most portfolios on PortfolioDB.

Max Drawdown: The largest peak-to-trough decline in portfolio value over the full historical record, expressed as a percentage. It represents the worst-case loss an investor would have experienced if they bought at the highest point and sold at the lowest (before recovery). On PortfolioDB, max drawdown is the primary input for both the risk rating and the minimum suggested timeline. See the Methodology page for details.
Momentum Investing: A strategy based on the observation that assets that have recently outperformed tend to continue outperforming in the near term. Momentum strategies rotate into recent winners and out of recent losers on a regular schedule. It is one of the most studied and persistent factors in financial research, though it can suffer sharp reversals during sudden market regime changes.

Real Estate / REITs: Real Estate Investment Trusts (REITs) are companies that own income-producing properties -- office buildings, apartment complexes, shopping centers, and more. REIT index funds provide exposure to real estate returns without owning property directly. REITs are often included in diversified portfolios for their income and partial inflation-hedging properties.
Rebalancing: Periodically restoring a portfolio back to its target allocation. If stocks have grown from 60% to 70% of a portfolio after a bull market, rebalancing means selling some stocks and buying other assets to restore the 60% target. Most buy-and-hold portfolios on PortfolioDB rebalance annually. Rebalancing enforces a "buy low, sell high" discipline automatically.
Risk-Free Rate: The theoretical return of an investment with zero risk, used as a baseline in ratio calculations like the Sharpe and Sortino ratios. PortfolioDB uses 4.5% annually (0.375% per month), approximating the long-run average yield on short-term U.S. Treasury bills.
Risk Level: PortfolioDB’s 1--5 scale rating each portfolio’s historical risk. Level 1 is very conservative; level 5 is very aggressive. Ratings are based on max drawdown and worst calendar year return over the full history. See the Methodology page for the exact thresholds.
Risk Parity: A portfolio construction approach that allocates based on each asset’s risk contribution rather than its dollar weight. Since bonds are less volatile than stocks, a risk parity portfolio gives bonds a larger share of capital so that every asset contributes equally to total portfolio risk. Ray Dalio’s All Weather Portfolio is a well-known example.
Rolling Returns: Returns measured over a sliding window -- for example, every possible 1-year or 5-year period in the historical record. Rolling returns show how a portfolio has performed across many different market environments, not just over one fixed start and end date. The low, average, and high rolling return figures on PortfolioDB summarize the range of outcomes investors have historically experienced.

Sharpe Ratio: A measure of how much return a portfolio has generated per unit of risk (volatility). A higher Sharpe ratio means more return for the amount of risk taken. It is calculated by subtracting the risk-free rate from the portfolio’s return, then dividing by the standard deviation of monthly returns. See the Methodology page for our risk-free rate assumption.
Sortino Ratio: Similar to the Sharpe ratio, but it only penalizes for downside volatility -- months where the portfolio lost money -- rather than all volatility. This makes it a more useful measure for investors who don’t mind upside swings but do care about losses. A higher Sortino ratio is better.
Strategic Asset Allocation: A long-term, fixed asset allocation that is periodically rebalanced back to target weights regardless of market conditions. The investor decides upfront on a mix (say, 60% stocks / 40% bonds) and sticks to it through market cycles. This is the approach used by all Buy and Hold portfolios on PortfolioDB.

Tactical Asset Allocation: An approach that actively adjusts the portfolio’s mix based on market conditions, economic signals, or momentum rules. Unlike buy-and- hold, tactical portfolios may hold cash, shift dramatically between asset classes, or go defensive during downturns. Higher potential for reducing drawdowns, but also higher complexity and the risk of whipsawing in choppy markets.
Total Return: Return that includes both price appreciation and any income paid by the investment -- dividends from stocks, interest from bonds -- with income assumed to be reinvested. Total return is the most meaningful way to measure long-term performance. All returns on PortfolioDB are total returns.

Ulcer Index: A measure of downside risk that captures both the depth and duration of drawdowns. Unlike max drawdown -- which only measures the single worst peak-to-trough drop -- the Ulcer Index penalizes portfolios that spend a long time underwater, even in a series of smaller declines. Lower is better.
UPI — Ulcer Performance Index: The portfolio’s excess return (above the risk-free rate) divided by its Ulcer Index. Think of it as a Sharpe ratio that uses the Ulcer Index as the risk measure instead of standard deviation. Because it focuses on downside risk and recovery time, some investors find UPI more intuitive than Sharpe. Higher is better.

Volatility: The degree to which a portfolio’s returns fluctuate over time, measured as the standard deviation of periodic returns. High volatility means bigger swings in both directions. Volatility is the risk measure used in the Sharpe and Sortino ratio calculations. It is distinct from drawdown: a portfolio can be volatile without experiencing deep sustained losses, and vice versa.

Want more detail?

The Methodology page covers how every performance metric on the site is calculated, where our data comes from, and the limitations you should keep in mind.