So many metrics!

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azhangli
Posts: 10
Joined: Fri May 29, 2020 4:24 pm

So many metrics!

Post by azhangli »

Hello BH,

In an effort to boost my own knowledge of investing, I decided to sign up for a class. I'm currently learning about metrics and ratios, and frankly, I feel like the more I learn, the less I know! If I'm looking at 3 different allocations, A has the highest Sharpe ratio, B has the highest CAGR, C has the lowest drawdown, and the list goes on and on.

I guess my question is, how do folks make decisions if the metrics and ratios are all over the place and there's no strong consensus? (p.s. I thought my current fund of 70/25/5, domestic, international, bond is pretty solid but turns out it only has a Sharpe ratio of 0.52. Wha-?)
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: So many metrics!

Post by retiredjg »

Welcome to the forum. :happy

If you are interested in this sort of thing, learning about metrics is a good thing. But knowledge of metrics is not necessary for basic Boglehead investing. Not even a little bit. Good simple basic investing can be accomplished without knowing any metrics.

I'm not saying there aren't people here who know what things like Sharpe ratios are. But one of the basic principles of BH investing is that it is simple enough that anybody can do it without knowing any of that stuff.

What we concentrate on here is
  • -investing broadly in the broad or whole market
    -in a low cost manner (this includes both costs of investing and keeping taxes low)
    -at a stock to bond ratio that you can live with in good times and bad times
    -without trying to time the market
No metrics are needed for any of this. In fact, it is some of this complicated math stuff that makes ordinary people afraid to do their own investing.
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JoeRetire
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Re: So many metrics!

Post by JoeRetire »

azhangli wrote: Sat Nov 27, 2021 2:32 pm I guess my question is, how do folks make decisions if the metrics and ratios are all over the place and there's no strong consensus?
Most folks don't look at the "metrics and ratios" as their decisions don't require them.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Topic Author
azhangli
Posts: 10
Joined: Fri May 29, 2020 4:24 pm

Re: So many metrics!

Post by azhangli »

retiredjg wrote: Sat Nov 27, 2021 3:08 pm Welcome to the forum. :happy

If you are interested in this sort of thing, learning about metrics is a good thing. But knowledge of metrics is not necessary for basic Boglehead investing. Not even a little bit. Good simple basic investing can be accomplished without knowing any metrics.

I'm not saying there aren't people here who know what things like Sharpe ratios are. But one of the basic principles of BH investing is that it is simple enough that anybody can do it without knowing any of that stuff.

What we concentrate on here is
  • -investing broadly in the broad or whole market
    -in a low cost manner (this includes both costs of investing and keeping taxes low)
    -at a stock to bond ratio that you can live with in good times and bad times
    -without trying to time the market
No metrics are needed for any of this. In fact, it is some of this complicated math stuff that makes ordinary people afraid to do their own investing.
Thank you!

Definitely. I have and plan to leave 97% of my portfolio in the traditional 3 fund split. But I'm also interested in diving deeper into the investment world, but only with "play money" and I'm aware that I probably won't beat the market (I'd be lucky to not lose money!). I think more than anything it's to satisfy an itch and that "what if" curiosity, in addition to learning something in my free time!

edit: I wonder too though if those ratios come in handy when we're deciding between basic asset allocations? Like a 60/40 vs 70/30 stock/bond.
Grt2bOutdoors
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Location: New York

Re: So many metrics!

Post by Grt2bOutdoors »

So, you didn't subscribe to the "nobody knows nuthin" class? Of course, there are metrics, statistics, theories, etc. What does it all mean? Not much if you subscribe to the class above. It's likely you will succeed in investing if you do a few things right - 1) drop the class, 2) select an asset allocation you can understand in a few words - I own the entire world market capitalization of public companies or I own slices of domestic and international equities, some nominal and inflation linked fixed income securities in the following proportions that allows me to sleep well at night. 3) invest with regularity, 4) rebalance according to your own set of metrics +5%/-5%.

Spend your time on other more important things to do.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: So many metrics!

Post by retiredjg »

azhangli wrote: Sat Nov 27, 2021 3:26 pm
retiredjg wrote: Sat Nov 27, 2021 3:08 pm Welcome to the forum. :happy

If you are interested in this sort of thing, learning about metrics is a good thing. But knowledge of metrics is not necessary for basic Boglehead investing. Not even a little bit. Good simple basic investing can be accomplished without knowing any metrics.

I'm not saying there aren't people here who know what things like Sharpe ratios are. But one of the basic principles of BH investing is that it is simple enough that anybody can do it without knowing any of that stuff.

What we concentrate on here is
  • -investing broadly in the broad or whole market
    -in a low cost manner (this includes both costs of investing and keeping taxes low)
    -at a stock to bond ratio that you can live with in good times and bad times
    -without trying to time the market
No metrics are needed for any of this. In fact, it is some of this complicated math stuff that makes ordinary people afraid to do their own investing.
Thank you!

Definitely. I have and plan to leave 97% of my portfolio in the traditional 3 fund split. But I'm also interested in diving deeper into the investment world, but only with "play money" and I'm aware that I probably won't beat the market (I'd be lucky to not lose money!). I think more than anything it's to satisfy an itch and that "what if" curiosity, in addition to learning something in my free time!
There is no reason not to learn and use more about a subject you are interested in. :happy It's just that those things are not needed for ordinary people to be successful investors.

edit: I wonder too though if those ratios come in handy when we're deciding between basic asset allocations? Like a 60/40 vs 70/30 stock/bond.
I'd have to say that most people here do not use formal metrics for this. The emphasis is on how much risk a person is willing to take (what can your gut tolerate easily and what allows you to sleep at night), able to take (based on time your portfolio will need to recover after a downturn/bear market before you need the money) and need to take (to achieve your goals).

You'll find discussions of need, ability, and willingness to take risk in the Wiki under Risk.
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Beensabu
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Re: So many metrics!

Post by Beensabu »

azhangli wrote: Sat Nov 27, 2021 3:26 pm edit: I wonder too though if those ratios come in handy when we're deciding between basic asset allocations? Like a 60/40 vs 70/30 stock/bond.
The equity portion of your portfolio can drawdown anywhere from 20-80% (or less, obviously) at any time. Split the difference at 50%.

How much of your portfolio could you stand to see drop in total $$$ amounts within a few weeks, months, years, not knowing when it will go back up?

Take that $$$ amount, multiply it by 2. That's the maximum you can tolerate having in equities. Sometimes, there will be a drop and it won't drop by half. But maybe once in your lifetime, there will be a drop and it will drop by more than half. Know it can happen. Do not exceed your risk tolerance.

The past tells you what happened in the past. It could happen in the future. Or the future could (probably will) be different in some way. Better or worse. You don't know. We don't know. Metrics fit the past, not the future.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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AnnetteLouisan
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Location: New York, NY

Re: So many metrics!

Post by AnnetteLouisan »

OP, you’ve actually identified a central tenet (not tenant, that’s the RE thread) of BHism, namely that investing is presented as needlessly complicated but you don’t need advisors to do it on your own. Glad you are here!
chris319
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Re: So many metrics!

Post by chris319 »

Nothing wrong with expanding your knowledge of investing.

Here is a great video showing how to value a stock Benjamin Graham style:

https://www.youtube.com/watch?v=SU9E14c8PDY

I'm not sure this will be of much use to you if you're going to buy and hold index funds.
Financial decisions based on emotion often turn out to be bad decisions.
HyperCat
Posts: 91
Joined: Fri Jan 29, 2021 9:44 am

Re: So many metrics!

Post by HyperCat »

As others have alluded to, one thing to keep in mind is that literally every metric is informed by past data, but no amount of past data can show you the future with any certainty. That's why I don't bother with metrics for the most part. Do they work sometimes? Sure, about as often as they don't work.
59Gibson
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Joined: Mon Dec 07, 2020 7:41 am

Re: So many metrics!

Post by 59Gibson »

This sounds like lingo for stock picking/options etc.
VaR
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Joined: Sat Dec 05, 2015 10:27 pm

Re: So many metrics!

Post by VaR »

azhangli wrote: Sat Nov 27, 2021 2:32 pm In an effort to boost my own knowledge of investing, I decided to sign up for a class. I'm currently learning about metrics and ratios, and frankly, I feel like the more I learn, the less I know! If I'm looking at 3 different allocations, A has the highest Sharpe ratio, B has the highest CAGR, C has the lowest drawdown, and the list goes on and on.

I guess my question is, how do folks make decisions if the metrics and ratios are all over the place and there's no strong consensus? (p.s. I thought my current fund of 70/25/5, domestic, international, bond is pretty solid but turns out it only has a Sharpe ratio of 0.52. Wha-?)
As others have said, you don't need to understand any of these ratios in order to determine an age-appropriate asset allocation for your investment portfolio.

That said, I thought I might help you to give you my opinion of the three metrics you've mentioned:
1. Sharpe ratio is a measure used to analyze the risk of a portfolio compared to its return. As a tool, you could use it to analyze the risk adjusted return of your asset allocation. You can think of it as your return divided by your risk, even though it's really historical excess return divided by historical excess risk. In the past, I've used it to help me choose my international allocation by finding an allocation that maximized the Sharpe ratio. Doing this today would be problematic because of the current outperformance of US over Global ex-US. This measure is still usable for picking a US vs Global ex-US bond allocation.
2. CAGR is just a way of expressing return as a geometric average. This is generally accepted as better but is hard to find/use because the mutual fund industry standard is to quote historical return as an arithmetic average. I use it when it's available but I don't jump through hoops if it's not available. I've never had to do analyses for my personal investing where it was critical.
3. Drawdown is a measure of risk. I prefer to use standard deviation, but drawdown is actually helpful to think about if you want to backtest your risk tolerance. I use it to confirm that as a person, I can psychologically withstand that amount of loss in my portfolio without capitulating to fear and selling out.

As an example with your current portfolio, you could probably decrease your backtested CAGR, decrease your max drawdown, and increase your Sharpe ratio by increasing your allocation to bonds. This doesn't tell you what to do, though it does indicate the different properties that a portfolio with a higher bond allocation had in the past, or might have in the future.
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