Which portfolio would you rather have?
From 1985 – 2008:
Sharpe Ratio: 0.43
Worst Year: -17.99%
Sharpe Ratio: 1.04
Worst Year: -2.70%
Seems simple, right? Portfolio B has returns over 3% higher per year than Portfolio A. Portfolio B is roughly 40% less volatile than Portfolio A. The Sharpe Ratio for Portfolio B is more than double Portfolio A and the worst year is far smaller.
Portfolio A is the S&P 500, and Portfolio B is the Harvard Endowment (and Yale performs even better). Both are fiscal year ending June 30th. Many people are complaining about how terrible the Harvard Endowment is doing this year (down 22% versus stocks down around 40%), but over long time frames, the Harvard Endowment is far superior to a buy and hold of the best performing asset class over this time period. (And I have no idea how accurate Harvard has been in marking their portfolio so yes I understand that 22% figure could be revised.)
And before I get shelled with reader comments, please remember that I do not advocate a buy and hold portfolio but rather a tactical one (which would have done about 12% with 7% volatility and a Sharpe around 1 with no down years over the same time period). I am merely making an observation.
Better than stocks on a risk-adjusted basis, worse on an absolute basis.