Sortino Ratio

There’s a lot that goes into portfolio management: numbers, accounting, crystal balls. But one of the most important elements revolves around how you manage volatility.

Usually, investors choose to trade off volatility for risk...but what if you could separate out general volatility from the harmful volatility (i.e. losses)? That’s what the Sortino ratio does. It's a risk-adjusted measure of portfolio returns with a certain financial goal in mind.

The higher your Sortino ratio, the better your portfolio is performing. It all depends on what you set as the lowest acceptable returns on your investments though...so the more realistic you’re being, the better.

If you’ve heard of the Sharpe ratio, the Sortino ratio is very similar. The Sharpe ratio adjusts for upward and downward volatility, while the Sortino ratio only adjusts for downward volatility. While the Sharpe ratio is symmetric, a lot of portfolio managers prefer the Sortino ratio, since they only want to negate losses. Upward volatility is a good thing...where the money’s at (when you've bet that way in your investments).