Drawdown, CAGR, volatility and Sharpe: how to read a strategy's metrics
On every strategy sheet we show the same metrics. This is the guide to reading them.
CAGR: compound annual growth rate
It is the constant annual percentage that would give you the same final result. If $100 becomes $200 in 10 years, the CAGR is ≈7.2%.
Formula: (final value / initial value) ^ (1 / years) − 1.
Note: it says nothing about the path. Two strategies with the same CAGR can have had very different drawdowns.
Volatility
The standard deviation of monthly returns, annualised. It measures how much results "dance around". The higher the volatility, the more swing (up and down).
Maximum drawdown
The largest fall from a peak to a later low. If your portfolio rises to $100,000 and then falls to $70,000, the drawdown is −30%.
It is probably the most important metric for you, because it measures how much pain you would have to endure without selling. Look at how long it takes to recover.
On this site:
| CAGR | Maximum drawdown | |
|---|---|---|
| HAA Balanced | 9.7% | -9.3% |
| S&P 500 | 10.8% | -50.8% |
The two figures do not cover the same period (the S&P 500 has more history): to compare rigorously use the comparison tool with the same start date.
Sharpe ratio
It measures how much extra return (above cash) you get for each unit of volatility: (return − risk-free rate) / volatility. Higher is better. As an order of magnitude: below 0.5 is weak, 0.5-1 is good, above 1 is very good (and suspicious if very high in a backtest).
Other metrics we show
- Worst year / best year: the real range of annual results.
- Positive months: what percentage of months end in the green.
- Turnover: how much is bought per year; the more, the more costs and taxes.
- Defensive fraction: the average time the portfolio spends in the safe asset.
How to compare strategies without fooling yourself
- Same period.
- Same costs.
- Look at drawdown and return together (Calmar: CAGR / drawdown).
- Ask yourself whether you could withstand the worst year.
Frequently asked questions
What is a good CAGR?
It depends on the risk. 10% with a −50% drawdown is very different from 8% with −10%.
Why is the Sharpe sometimes negative?
If the strategy returns less than cash over the period, the excess return is negative.
Why do you use monthly returns?
It is the frequency of the signals and the trades. Drawdowns calculated with daily data would be somewhat larger.