Portfolio Efficiency Ratio

"PER" stands for Portfolio Efficiency Ratio. 

 

Simply put, this ratio identifies how efficient your portfolio is at earning you returns while keeping your risk to a minimum.

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SHARPE RATIO

At Centennial Wealth Advisory, LLC, we find that the well-known SHARPE Ratio is the very best one to use to identify your PER.  The SHARPE Ratio has the potential to predict your future success or failure with your retirement planning.

As a simple example, from January 1, 2000 to December 31, 2015, the S&P 500 (a common index that reflects the stock market) averaged a return of 5.68% per year.  The worst return year was 2008, which had a 37% loss.

To average a 5.68% return in the S&P 500, you had to be willing to lose 37% of your total value in a single year.

The SHARPE Ratio for the S&P 500 over this period of time was 0.29.

Compare this with a portfolio that earned exactly the same average return over the exact same time frame.  But this second portfolio had a worst return of -5% in 2015.

In this case, you only had to risk 5% of your money to gain a 5.68% average rate of return.

The SHARPE Ratio on this portfolio was 0.91.

 

Why Does This Matter?

It matters because when you do the math, you learn that portfolios with low SHARPE Ratios, like the S&P 500, perform exceptionally poorly when you are distributing income out of the portfolio on a regular basis.

On the other hand, a portfolio with a higher SHARPE Ratio handles the distribution phase during retirement much better.  Higher SHARPE Ratios indicate a more stable portfolio.

Your goal should be to have the SHARPE Ratio on your portfolio exceed 1.0.  If it does, then you can feel confident that your retirement future will be bright, regardless of what the markets throw your way.

Because of this simple fact, we at Centennial Wealth Advisory, LLC, focus on building personalized retirement portfolios for our clients that have a SHARPE Ratio higher than 1.0.

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