An extraordinary run of low risk persists for the Global Market Index (GMI), an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash). After the benchmark posted another monthly gain in July, risk-adjusted performance ticked higher once again.
GMI’s 10-year Sharpe ratio (SR) edged up for a fifth straight month to 0.86, the highest since January 2020, based on a rolling ten-year window via monthly data. A Sharpe ratio of 1.0 equates with return matching risk (return volatility) and higher (lower) Sharpe ratios indicate higher (lower) risk-adjusted performance.
Profiling GMI through a drawdown lens also reflects an extended stretch of low risk. For a sixth month in row through July, GMI’s peak-to-trough decline has been zero, courtesy of the index’s ongoing rally to new highs.
GMI represents a theoretical benchmark for the “optimal” portfolio. Using standard finance theory as a guide, this portfolio is considered a preferred strategy for the average investor with an infinite time horizon.
Those assumptions are, of course, unrealistic in the real world. Nonetheless, GMI is useful as a baseline to begin research on asset allocation and portfolio design. GMI’s history suggests that this benchmark’s performance is competitive with active asset-allocation strategies overall, especially after adjusting for risk, trading costs and taxes.
The table below presents additional risk metrics for GMI and its underlying asset classes, based on a trailing 10-year window through last month.
Here are brief definitions of each risk metric:
Volatility: annualized standard deviation of monthly return
Sharpe ratio: ratio of monthly returns/monthly volatility (risk-free rate is assumed to be zero)
Sortino ratio: excess performance of downside semivariance (assuming 0% threshold target)
Ulcer Index: duration of drawdowns by selecting negative return for each period below the previous peak or high water mark
Maximum Drawdown: the deepest peak-to-trough decline
Beta: measure of volatility relative to a benchmark (in this case GMI)
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