Tag Archives: Sharpe ratio

How to understand the figures of my portfolio to obtain better results? (I)

It sounds very nice when you think that you have your own investment portfolio. It is an important step to improve your finances and get your goals. The question is that a portfolio has its own life since its inception and your responsibility as investor is guiding the portfolio to your interests. What are the signals that you have to follow?

Well, there are many figures and parameters to measure the quality of your portfolio, but we will select the main ones in order to get the most important data:

  • The performance evolution: the figure alone is not enough, because it has to be put in comparison to others. We recommend comparing it with the smart benchmark. This comparison provides the view to understand if we have chosen the right assets or not. For instance, this example shows that we are far from the benchmark and there is a wide improvement to manage.

portfolio performance in T-Advisor

  • The weight of the assets in your portfolio: it is also relevant to understand the allocation. If we have a concentration in a country or a sector, there is a high risk to suffer from instability, if the trend changes. Diversification reduces risks, but we can have some assets with lower returns. A good analysis can help us look for similar assets with better figures in order to rebalance the portfolio.

weight of assets in a portfolio

  • The relationship between performance and volatility: first of all, volatility does not mean necessarily more risky, as we have already commented. However, we can understand the connection between performance and volatility through the Sharpe ratio. This figure shows how profitable an investment is related to the historical volatility. The higher the ratio is, the better the investment is… but this idea is not totally right if we do not compare two assets. You can find two assets with similar ratios but with different figures. We have to look into the numbers to understand if it has a high performance with a high volatility.

Portfolio sharpe ratio

There are some other figures that we will soon comment.

My goal in bearish markets: capital preservation

Markets are currently very volatile. We have lived a strong bearish period, but it is not sure that the bulls are coming, as the trend is not clear yet. In this case, panic is the worst adviser. On the contrary, investors have to analyse properly their portfolios to take right decisions. If you are not a trader, if you are a long-term investor, then you have to assume that it is difficult to avoid losses in some periods, moreover when all markets are dropping. So, your goal has to be another: capital preservation.

What does capital preservation mean? Your goal as investor must be to keep your assets with the less possible losses or, of course, to obtain benefits. As there are many changes in the long term, then you have to concentrate your worries in the bearish times: how much are you losing? The success is not to lose or lose less than the reference markets, but how can you get that information? The answer is smart benchmark.

Smart benchmark chart in T-Advisor

The picture above is very clear: my portfolio is losing, because I have invested in a market that is going hard into negative, but I only lose -2.4%, while the reference market (the smart benchmark) loses -14%. Not bad, huh?

As we regularly say, it is important to have available the right tools to analyse your investments and take decisions. Capital preservation has to be your first goal. Don’t lose money or lose the least. Then it the bullish times, your goal has to be to outperform the reference market.

The following chart is even clearer:

Portfolio risk figures

My Germany portfolio is much better than the benchmark: quite less losses in a bear period, less volatility and better Sharpe ratio.

What other tools do I have to consider risks in order to preserve my capital?

  • Analyse how your positions contribute to risk your portfolio. In this case, you can find out if you have an uncomfortable asset to be substituted.

Risk contribution chart in T-Advisor

Risk profile comment with portfolio risk in T-Advisor

  • Consider the diversification. In bearish periods, diversification is a great help to avoid hard losses. You can analyse it with the diversification benefit, that compares how much you win if your portfolio has different assets:

Diversification benefit in T-Advisor

  • Look at the Value at Risk, which measures the probability of having a certain level of losses. As you can see, my portfolio has the worst VaR, what means that I have to consider some changes in my allocation to avoid future losses.

Portfolio risk table in T-Advisor

All these figures will help you to understand your current position and risk. Then you can decide if you have to rebalance totally or partially your portfolio. The strategy is clear: keep your capital and set your portfolio to lose less in bad times and outperform the benchmark in growing times.