Page 1 of 1

How to account for "high" standard deviation & small Sharpe ratio

Posted: Fri Jan 10, 2025 8:46 am
by Cincy_1988
I've the following tIRA portfolio:

VFIAX 44.71%
VBTIX 46.23%
VTIAX 9.06%

I used daily returns from 11-27-2010 and calculated the following values:

Portfolio annual average return = 7.96%
Portfolio annual standard deviation = 8.94%
Sharpe ratio (with 3% as the reference) = 0.534

I want to account for the "volatility" of my portfolio to figure out my retirement (in a few months) expenditures, Roth conversion, etc. How can I incorporate the standard deviation? I know I can't use a normal distribution, so +/-2 or +/-3 standard deviations don't really mean much.

Thank you!

Re: How to account for "high" standard deviation & small Sharpe ratio

Posted: Fri Jan 10, 2025 9:40 am
by bynomial
you can use a tool like https://tpawplanner.com/

if you don't like their default return assumptions, you can input your own. you could also use portfolio visualizer, be sure to check the 'statistical returns' option.

I don't know the details of their Monte Carlo, but I'd be surprised if they weren't using normal distribution. The assumptions made on returns, inflation, etc. will likely swamp the effects of using normal distribution

Re: How to account for "high" standard deviation & small Sharpe ratio

Posted: Fri Jan 10, 2025 10:50 am
by Cincy_1988
Thank you!