From Graham Hand, Managing Editor of Cuffelinks (27 July 2017)
The Holy Grail of investing is high returns with low risk. When a fund or index delivers a return of say 10% and volatility (used as a measure of risk) of 10%, analysts say it has a ‘Sharpe Ratio’ of 1.0 (ie return/risk). This ‘risk-adjusted return’ rarely averages over 1.0, and 0.5 is considered a good result. Yet according to Bloomberg, in the 100 months to June 2017, the S&P500 index delivered a Sharpe Ratio of 1.4. A stellar result.
As good as it gets: Sharpe Ratio of S&P500 over rolling 100-month periods
In the long-term history of investing, it’s a Black Swan event, with returns of 18% pa and volatility of 13%. It is the best result since 1959, and this is simply an index. How many investors realise how wonderful the returns have been from the largest stockmarket in the world?