Sharpe move or risky decision?
Updated: May 20
We all invest for the same reason. To increase the value of our money. Regardless of our investing goals, everyone wants to see their wealth grow.
But if you spend any time with someone who has worked for a hedge fund, you know that good returns are only part of the story. Professionals are measured not only on their returns, but on their returns measured against the volatility, or risk, that they’re carrying in their portfolio.
The Sharpe Ratio
This measure was made famous by Nobel Laureate William F. Sharpe and has long been considered a golden rule of sound investing. Before him, people factored risk into their investing activity, but not as formally. The version of return/risk ratio that he espoused stated that the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.
It’s about a lot more than how big your returns are, it’s about balancing your portfolio for good days in the market and bad ones. Sure, big returns are great, but losses inevitably happen. The Sharpe ratio makes sure that when they do, you survive to fight another day.
Managing for risk
These days, I see a lot of new investors chasing speculative stocks without doing much research or due diligence. If the price of a stock looks like a great value, check its risk. Chances are, it’s higher than it should be. That’s why it’s cheap. You can’t treat stocks like a lottery ticket, because if you don’t win playing the lottery, you haven’t lost much. If you pick a stock without knowing its risk profile, you have no idea if it will just evaporate along with your savings.
Risk and volatility aren’t bad things, in fact every portfolio should have a proportionate amount. But the key word is proportionate. Balanced. Accounted for. There are certain principles of investing that shouldn’t be ignored.
When I started All of Us this was something I was very deliberate about – educating investors, new and old, on how to make sure they were making more informed decisions about their investing. I wanted them to be aware of sound fundamentals that could not only grow their money, but also protect it.
The Sharpeshooter challenge
The trick, as I saw it, was to open up the market and treat investors, especially new ones, with care. Some of the competitors were simply handing the keys of the car to people without teaching them to drive.
Sure, “free trades” are great, but they often lead to bad outcomes, and in some cases, terrible accidents. My desire was, and is, to get people where they want to go safely, while also having some fun doing it.
So I came up with an engaging way to teach them good habits. I call it the Sharpeshooter Challenge (Get it? Sharpe ratio?). Simply put, I’m rewarding one of our members with a 10% reward each and every month for the portfolio that has the highest return balanced with the lowest risk. That’s an extra 10% to add to that member’s return for the month just for practicing good investment principles. So, if you had an overall 7% return, but it was balanced correctly against your risk, your return might increase to 17%.
Benchmark yourself like the pros do
That’s hard to beat, and something no one else in the space is willing to do – educate investors and reward them for learning good investing strategies rather than simply allowing them to jump into the market recklessly. Sound good? Open an account with All Of Us, join our Sharpeshooter Challenge and start seeing the benefits of benchmarking yourself like the pros do.