Dividend Stocks                  Tuesday, November 13, 2018


Portfolio Risk/Return Calculator

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About Low Risk Investments

I am not an investment professional. I am an engineer who caught the investment bug over 25 years ago when I was in college. Over the years I have made some great investments and I have had my share of failures. As they say, if you have never failed, you are probably not doing much. I believe the primary reason investing in the stock market is so darn hard is that our brains are not hard wired to make us good investors. You often need to do things that are so counter-intuitive. As Warren Buffett says, “you need to be greedy when others are fearful and fearful when others are greedy.” This is a lot easier said than done. On this website, I am hoping to bring you some of the tools and ideas that have helped me over the years.

The holy grail of investing is maximizing returns while minimizing risk. The primary risk is the loss of investment capital. Inflation is a hidden risk which over time can eat away your nest egg. In the investment community, risk is generally characterized by volatility. This website offers a free tool for calculating the annual returns and volatility of a basket of securities for any period of your choice. They can be stocks, mutual funds or ETFs (exchange traded funds). This is a tool I created for my own use after I got tired of spending hours downloading and crunching numbers using an Excel spreadsheet. The following is a quick overview of return and volatility.

Annual Return: This is the compounded annual growth rate of the security for the period calculated using monthly adjusted closing prices in Yahoo Finance. This data is adjusted for stock splits and includes dividend distributions. A common mistake when assessing annual return of mutual funds is using the simple average return. The problem with this method is illustrated with a simple example of a 2-year period when a fund was down by 50% the first year and up 50% the following year. Using simple average return, the investor is even at the end of 2 years ( -50% plus +50% which is 0% divided by 2 = 0%). In reality, the investor is actually down 25%. $10,000 invested is worth $5000 at the end of the first year, which then appreciates 50% in the second year and is now $7500. In this example, the compounded annual return is -13.4% which is a more accurate representation of the actual return.

Volatility: A common measure of risk associated with a security is its volatility represented by the standard deviation. In the world of stock investing, one takes on risk with the hope of being rewarded for it in the long run. In other words, you are generally rewarded with a premium in returns (relative to a safe investment such as US government note) for taking on additional risk. This is called the equity risk premium. If not for the potential premium in returns, why invest in anything but the safest instruments? Generally, the higher the expected return, the higher the volatility.

The volatility calculated by this site is the annualized standard deviation of monthly returns using the adjusted closing prices in Yahoo Finance. Please note that this data includes the dividend distribution. So, what does the standard deviation number tell us? It tells us that there is a good chance (2/3 of the time) that the annual return of the asset will be plus or minus one standard deviation of the mean return. For example, if the annual return is 15% and the standard deviation is 10%, then the expected annual return will be in the 5% to 25% range (which is 15% plus or minus 10%). All else being equal, the lower the volatility, the better.

Thanks for visiting this site. Please use the Feedback link to send your thoughts or suggestions. Happy investing!

B. Jacob