Sterling Ratio

If you’re in the business of managing a portfolio...even if it’s your own...you’ll likely hear of the Sterling ratio eventually. The Sterling ratio is a pretty basic risk-return ratio.

Basically: take your returns (annually compounded over the last three years), and divide that by your risk (the average annual maximum drawdown of the last three years, with some other tweaking). If you need a refresher: a drawdown is a peak-to-trough decline of an asset in a certain timeframe. Basically, watching an asset fall from its glory.

When you’re looking for a risk-adjusted return of a portfolio, the Sterling ratio is a good place to start. Unlike some super complicated measures, you can do the Sterling ratio yourself in a good ol’ spreadsheet without being an expert. Go ahead and try it. You know you want to.