The Only Investing Metrics You Should Care About

Investing metrics and terms are confusing. When you start on your investing journey, knowing which numbers you really need to care about can be hard to figure. Let’s get down to the basics. There are just four metrics to understand.

CAGR/Compounded Annual Growth Rate

Possibly the most important performance metric for any investment – stocks, ETFs, real estate, or your own brokerage account portfolio. What’s CAGR? A measure of how much your investments grew annually, i.e. what return did your investments bring year-on-year over a number of years. Longer durations are better since it shows you how your investment performed through multiple cycles of volatility. 

Returns from investments can vary wildly year over year. If your stock market investments brought you returns of 30%, 11%, and -5% across three years, how have these performed across a 3-year time period? The answer is a CAGR of 15%.

But let’s say you also invest in real estate that grows in value each year and has a CAGR of 2.2%. Looking purely at returns, not considering risk, volatility, or other factors, stock market investments are likely a better investment for you. 

What’s considered good and bad?

CAGR less than 3%:  Bad

CAGR between 3% and 6%: OK

CAGR between 6% to 9%: Good

CAGR greater than 9%: Great

Max Drawdown

Maximum Drawdown is a great risk metric to consider whether or not an investment is right for you. It tells you the most that a strategy’s value has fallen from its all-time high. For instance, shüts atom a max drawdown of just -8.34% over the last 10 years, meaning that through market crashes, covid sell-offs, and other ups and downs, the strategy did not lose more than 9% of it’s value. 

What’s considered good and bad?

Drawdown greater than -40%: Bad
Drawdown between -25% and – 40%: OK

Drawdown between -15% and -25 %: Good

Drawdown less than -15%: Great

Annualized Volatility/Standard Deviation

Let’s assume two stocks, A and B, that both started at $10 and closed at $15 at the end of a year. Stock A has a tendency to swing more, i.e. to go up to $18 one day, and fall to $5 another. On the other hand, stock B grows steadily, moving by $1-2 in either direction every day/month. Although both stocks gained the same at the end, 50% of their initial value, the journeys they took to get there are different. This is measured by their annualized volatility. Here’s why this is important:

1. Watching your investment swing wildly may cause the investor to panic and take an emotional decision to sell, even though it would do them better to hold.
2. You might need to withdraw funds at any time and may not want to risk a lot of movement in the value of your asset. 

Staying within a range of volatility that you are comfortable with is important to reach your goal while maintaining peace of mind.

What’s considered good and bad?

Annualized Volatility greater than 19%: Bad

Annualized Volatility between 12% and19% : Ok

Annualized Volatility between 10% and 12%: Good

Annualized Volatility between 7 and 10%: Great

Sharpe Ratio

Sharpe Ratio is a measure returns for each unit of risk taken on by an investor. The returns used to calculate this ratio are those in excess of any risk-free returns. On shüts, we’re using BIL, a treasury bill ETF, to define risk-free returns. BIL has a CAGR of 0.47%. BIL as an investment has an almost non-existent risk associated with it, but still offers some returns, albeit low. The Sharpe Ratio of another investment is a measure of the added risk you will take for increased returns. 

What’s considered good and bad?

Sharpe less than 0.35: Bad

Sharpe between 0.35 and 0.70: Ok

Sharpe between 0.70 and 0.95: Good

Sharpe greater than 0.95: Great

Where can i find these metrics?

At shüts we when a portfolio or a strategy is created, we run the numbers for you, letting you know what the above metrics of your investments are.  Emotional investing is usually a bad idea. The best-for-you investing strategy may not be one you choose for yourself. shüts wealth’s risk profile assessment is backed by data and helps you pick the strategy that works for your goals. Sign up for free  access today.