The Sharpe ratio is the industry standard method for measuring risk-adjusted returns. Anyone can increase returns by taking on more risk, but great investment strategies deliver high returns while taking less risk. This is considered the holy grail of investing because it represents how efficiently capital is deployed. Now that we’ve covered the metrics that identify both risk (standard deviation, maximum drawdown and beta) as well as returns (compound annual return), we can combine these measures to get a better understanding of risk-adjusted returns. This is to be expected because generally speaking, bonds provide lower returns over time. Using this particular method for assessing risk, we can also see that the TSP Model’s volatility with respect to the S&P 500 is less than that of a blended portfolio.Īt this point you may have noticed that bonds have much less risk than any of the other portfolios here. The TSP Model has a beta of 0.48, which means it’s only 48% as volatile as a portfolio of stocks. In this chart, the C Fund represents the S&P 500, so it has a beta of 1. Once again, we can see in the chart below that market risk for the TSP Model is significantly lower than that of stocks, and even below that of a blended portfolio. A beta of 1 implies the same level of volatility as the S&P 500, while a beta less than 1 implies less risk, and a beta greater than 1 implies more risk. Betaīeta measures the volatility (risk) of an investment strategy relative to the S&P 500. At this point you should be able to recognize that the TSP Model allows you to participate in more upside than a 100% stock portfolio can deliver, but also be exposed to significantly less downside risk. This chart presents one of the most compelling arguments for using the TSP Model. That’s a smaller magnitude decline than even the blended portfolio. As a result, the most the TSP Model has ever fallen from peak-to-trough is 22.8%. The TSP Model, on the other hand, was able to recognize deteriorating conditions during these treacherous periods and moved the entire portfolio to bonds. This has actually occurred twice over the last two decades, during the dot-com collapse and again during the financial crisis. Notice that stocks, as measured by the S&P 500, have experienced drawdowns in excess of 50%. A higher standard deviation, on the other hand, implies that returns fluctuate wildly from one year to the next. The lower the standard deviation, the more consistent the returns are, and therefore the more “safe” a particular strategy is. It measures the variability of returns over time. Standard deviation is the most common measure of risk used in the financial industry. We can see this by examining the three primary metrics that are used to quantify risk: standard deviation, maximum drawdown, and beta. Not only has the TSP Model vastly outperformed both stocks and bonds from a total return perspective, it has done so while exposing the portfolio to less risk. By investing in sync with the business cycle and being more tactical with its portfolio, the TSP Model takes full advantage of what current market conditions have to offer. This dynamic reverses during recessions, however, when bonds outperform and stocks tend to suffer. During economic expansions, stocks will vastly outperform bonds, while bonds will act as a performance drag. The reason for the TSP Model’s outperformance stems from the fact that it can move the portfolio between stocks and bonds as conditions change.
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |