Main asset classes July 2021 Risk profile


An extraordinary set of low risks persists for the Global Market Index (GMI), an unmanaged market-value-weighted portfolio that holds everything (except cash). After the benchmark posted another monthly gain in July, risk-adjusted performance rose again.

The GMI’s 10-year Sharpe ratio (SR) edged up for a fifth consecutive month to 0.86, the highest since January 2020, based on a ten-year rolling window via monthly data. A Sharpe ratio of 1.0 equates to risk matching return (return volatility) and higher (lower) Sharpe ratios indicate higher (lower) risk-adjusted performance.

Sharpe ratio annualized over 10 years GMI

Sharpe ratio annualized over 10 years GMI

Profiling the GMI through a withdrawal lens also reflects a broad scope of low risk. For a sixth consecutive month through July, the GMI’s peak-to-trough decline was nil, thanks to the index’s continued rally to new highs.

History of GMI direct debits

History of GMI direct debits

The GMI represents a theoretical benchmark for the “optimal” portfolio. Using standard financial theory as a guide, this portfolio is considered a preferred strategy for the medium investor with a infinite temporary horizon.

These assumptions are, of course, unrealistic in the real world. Nonetheless, the GMI is useful as a baseline for beginning research into asset allocation and portfolio design. GMI’s track record suggests that the performance of this benchmark is competitive with active asset allocation strategies as a whole, especially after adjusting for risk, trading costs and taxes.

For more context, readers can use this baseline risk profile for GMI alongside the current monthly performance updates (see asset class link above) and for the benchmark and its constituents. .

The table below outlines additional risk metrics for GMI and its underlying asset classes, based on a 10-year window to last month.

Performance and Risk Summary
Performance and Risk Summary

Here are brief definitions of each risk metric:

  • Volatility: annualized standard deviation of monthly return
  • Sharp Report: monthly returns/monthly volatility ratio (the risk-free rate is assumed to be zero)
  • Sorting report: excess performance of downside semi-variance (assuming 0% threshold target)
  • Ulcer index: duration of drawdowns by selecting a negative return for each period below the previous peak or high point
  • Maximum withdrawal: the deepest decline from peak to trough
  • Beta: measurement of volatility relative to a benchmark (in this case GMI)
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