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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Hi gang... wow!!! Date: 9/15/2013 7:31 PM
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Sortino Ratio....
Ray, can you integrate this into your spread?


Heh. It's already there, albeit incompletely. For the B&H and timed S&P500 -- didn't do it for the IUL. Sortino is a metric for downside deviation below a target percentage gain (MAR = minimum acceptable return). For my own work I like to use a MAR of 0%. Which clearly wouldn't work for an IUL because of the 0% floor.

The problem you guys have is that you are thinking that short-term volatility is risk. It isn't. (CC's recent posts show this, and I'm working on a response to that.)

And the problem with that is that is:
"over the full market cycle, investing to achieve short-term comfort costs a fortune." -- John Hussman

A few more quotes on that topic:
“You need long-term strategies to reach long-term goals, and paying
attention to short-term fluctuations in the stock market is one of
the most destructive things you can do for your long-term financial
health.” -- Jim O’Shaughnessy

"short-term volatility is largely the result of emotional investor overreaction to unfolding events. numerous studies attempted to link volatility to changing fundamentals have failed. So we are left with the inescapable conclusion that volatility is a measure of emotion and not risk, except in the case of building portfolios to meet short-term needs." -- C. Thomas Howard

"Short-term volatility and correlations shrink to insignificance as the time period lengthens. Sadly, the current infatuation with short-term volatility mitigation has us forgetting about returns, the most important driver of long-term wealth."

"Volatility remains a reasonable measure of risk for the short term. Long-term investors are better off considering the “margin of safety” concept. There is evidence that suggests that volatility understates risk for up to four years, but overstates risk for holding periods beyond four years." Credit Suisse

Anyway .... I'd have to rework the spreadsheet and add a columns in order to compute the ddev which goes into the Sortino. Frankly, I'm not incented to do that. The spreadsheet already tells me everything I want to know about IULs.

What *would* be interesting would be some sort of graph showing the difference between the periodic (monthly) returns of B&H vs. IUL. This is partially shown in Chart 7, the year-to-year returns.
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