President & CEO Dan Kraninger reflects on the first quarter of 2019 and provides insights moving forward.
According to the Global Financial Literacy Excellence Center, only 1/3 of Americans will answer these three questions correctly. They are the basis of every financial literacy quiz and not only is the number of Americans answering correctly falling in recent years but the US rate is also below the global rate. By the way, answers are A, C, and B. Financial literacy is an issue we should address. As more people live paycheck to paycheck and savings rates continue to decline, there is no time like the present. Without a rudimentary understanding of interest or compounding, how can people make sound financial decisions?
I know our client base would score way above the national average on this quiz. Through hard work and education, our clients have made many good financial decisions and amassed wealth because of them. This did get me thinking, though, what is the ensuing quiz for someone that has done well? What should they know now in order to make the most from their investments? I came up with the following short quiz with the belief that someone with a good understanding of the following portfolio management concepts should have a better chance of living the financial life they desire:
These might be tricky because they probably aren’t concepts you would spend much time on but, to us, they are our livelihood. Risk premium (question 1, A) beta (question 2, C), and Sharpe (question 3, C) are the business we are in – the pursuit of producing above average returns for the risks we take. Let me shape it this way, one of our flagship strategies, CAN SLIM®, is +8% YTD and the S&P 500 is +13% YTD. Is that good or bad? Well considering the risk we took, it’s quite good. For investors that value downside protection, we hedged during December’s decline and in the first quarter. In fact, we held near 50% cash at times during the last 3 months and still produced a return of +8%. We produced excess return given the beta of the portfolio and, if you do that over time, you produce a good Sharpe ratio. After 12 years, CAN SLIM®’s long term Sharpe ratio is 0.5 with a long term beta of 0.58. Said another way, we have done our job – producing better returns than the market given the risks we took along the way (especially in 2008).
I encourage you to set up time to talk with our advisors about these concepts. You don’t simply pay for the money management — you also pay for the advice. Understanding risk premium, beta, and Sharpe ratio are key concepts to making better investment decisions. This is the vernacular of portfolio management and could be the difference in making a good financial decision beyond the door. (Reference to the above quote and HBO’s Game of Thrones! 🙂