What are our risk-adjusted returns?

All of our strategies beat the traditional approaches as measured by Risk vs. Return

 

Increasing investment returns...while also reducing risk...is the primary design goal behind the development of our strategies. To demonstrate this, we will provide a straightforward measure of risk-adjusted return that we call:

• The Ratio of "Return per Unit of Risk"

Figure I

Return per unit of risk.

Here is a straightforward way to measure risk-adjusted return -- divide the Annualized Return of a strategy by the Standard Deviation of the strategy's annual returns. (Note: The more years of history you have to calculate this ratio, the more accurate the result.)

                               Annualized Return                      Return per

                               ---------------------      =             -------------

                               Standard Deviation                    Unit of Risk

Because Standard Deviation is a measure of the "volatility" of the returns (which is risk), you want Standard Deviation to be as low as possible.  You also want Annualized Return to be as high as possible compared to Standard Deviation.

• When Annualized Return is greater than the Standard Deviation, the "Ratio of Return per Unit of Risk" is greater than 1.0-times.

Get paid for the risk you take.

A ratio of 1.0-times or more tells you that a strategy is delivering more return annually than the annual risk you take as measured by 1 Standard Deviation.  A ratio of less than 1.0-times tells you that a strategy's returns may be inadequate to compensate you for the level of risk.  As an investor, your objective should be to earn as much return as possible with the least amount of risk.  Therefore, the Ratio of Return per Unit of Risk tells you exactly what you need to know.

Let's compare our market timing based strategies with the two traditional investment strategies that are commonly used -- "Buy and Hold" and "Asset Allocation" (assuming the following fixed portfolio mix:  30% Large-cap stocks, 30% Small-cap stocks and 40% Bonds).

• Figure I above displays the Ratio of Return per Unit of Risk for each strategy's performance as estimated over the eight year period from January 1, 1999 through December 29, 2006 .

The Traditional Strategies Had a Low Risk-Adjusted Return -- Less than 1.0-times: The "Buy and Hold" strategy had a Ratio close to zero because its Annualized Return was near zero over the past eight years.  The very low ratio tells you that a Buy and Hold strategy does a very poor job of compensating an investor for the degree of risk.  The "Asset Allocation" strategy did better with a Ratio of 0.7-times.  This improvement was primarily due to its much lower Standard Deviation (volatility).  However, a traditional "Asset Allocation" approach fails to deliver Annualized Returns that are high enough to compensate even for it reduced Standard Deviation -- so its Ratio of Return per Unit of Risk is still below the 1.0-times threshold.

Our Strategies All Produced High Risk-Adjusted Returns -- Most Greater than 1.0-times:  Over the past eight years, you would have been well compensated for risk with any one of our strategies, even though this period of time included three years of bear markets.  The Conservative Portfolio strategy produced nearly the highest Ratio of 1.2-times.  This is our lowest-return strategy, but it had a higher Annualized Return than either of the traditional strategies (see the table below) and it did so with an even lower Standard Deviation ... therefore it produced a higher Ratio of Return to Unit of Risk. This strategy can be appropriate for retirement investing.

• Our high-return Performance Xtender strategy earned the highest ratio ... 1.3-times. 

Our strategies can reduce risk while increasing returns.

In addition, we will show you (in a table below) three different risk statistics that are commonly used within the money management world to measure the riskiness of our strategies.  The three statistics are (see definitions below):

• Standard Deviation
• Maximum Drawdown
• The Ulcer Index

Reduced Risk: Compare any of the three risk measures for our strategies (in the table below) with a Buy and Hold approach and you will see a striking difference.  Our dynamic assset allocation strategies provided a substantial degree of risk reduction over the long term, including periods of bull markets and bear markets.

Higher Returns : Our strategies can increase returns simply by reducing risk.  Avoiding significant losses helps you to "build profits on top of profits" which translates into higher average annualized returns over time through the magic of compounding.  But in addition, we can magnify the improvement of returns by dynamically moving your portfolio into the strongest-performing market sectors. Compare our Annualized Returns in the table below (Also see note below on Calculation of Returns) with those of a Buy and Hold approach or a traditional Asset Allocation method.

Figure II

• The Conservative Portfolio Delivered Decent Returns With Very Low Risk: Over the past seven years, this strategy delivered a 9.8% average Annualized Return while suffering a Maximum Drawdown ("Peak to Valley" loss) of only -5.2%. Its Ulcer Index (see definition below) measured an extremely low 1.68 which means that the strategy spent very little time in a losing position.
  • Compare this to the traditional Asset Allocation approach which earned a lower, average 7.3% return combined with a much higher Maximum Drawdown of -12.7% and a higher Ulcer Index of 3.6.
• The Performance Xtender Delivered Superior Returns With Moderate Risk: This strategy earned a very attractive 22.2% average Annualized Return while suffering a Maximum Drawdown of only -8.5%. This strategy measured an Ulcer Index of only 2.87 which is very low, indicating that it spent very little time in a losing position.
  • Again, compare this to a traditional Asset Allocation approach and see that this strategy delivered a much higher average return with even less risk
• The Max Xtender and Growth Protfolio also Delivered Superior Returns Relative to Risk: The Max Xtender suffered a high Maximum Drawdown of -31.5%, but it produced a very high Annualized Return of 36.8% with a much reduced Ulcer Index compared to a Buy and Hold strategy.
  • The Growth Portfolio strategy produced a much higher Annualized Return than the Asset Allocation method with a reduced Maximum Drawdown and Ulcer Index.

• Standard Deviation - measures statistical volatility and is the most commonly used risk measure. The lower this figure, the better. (For an expanded definition, see standard deviation.)
• Maximum Drawdown - simply states the largest percentage "Peak to Valley" decline experienced by the strategy during the six years. This statistic is straightforward for an investor to compare with their own personal tolerance for risk. For example:  If you don’t ever want to lose more than 10% of your portfolio’s investment balance, then don’t choose a strategy with a Maximum Drawdown statistic greater than 10%. (See expanded definition.)
• Ulcer Ratio - a statistic which expands on the Maximum Drawdown idea by taking into account the period of time that a strategy has been "underwater". It is called the Ulcer Ratio because it attempts to more accurately measure an investor’s stress following a given strategy since that stress is a function of both a) the degree of loss and b) the time spent in a losing position. The lower this statistic, the easier the strategy may be for an investor to emotionally sustain.

Note on Calculation of Returns:  The estimated investment returns presented here are calculated on an annualized basis, assuming annual compounding, averaged over the past seven year period. Specifically, we provide the calculated average Annualized Return, derived from each strategy’s seven-year Total Return. Furthermore, the return calculations are estimated based upon a blend of actual, live results combined with back-tested results depending upon the date upon which each strategy began tracking live results.