Correct standard deviation

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Joined: Wed Dec 30, 2015 5:49 am

Correct standard deviation

Post by pnsdsb »

I am enjoying using the planner and have learned a lot from it. I thank you for providing it to the community.

One question I am struggling with is the correct standard deviation to use for a custom analysis. Your various investing styles have a fixed rate of return and a standard deviation associated with them. However, the rate of return of some of them may be too high. For example, my portfolio is an above average risk portfolio but a more conservative estimate of rate of return is 7 percent, and this is close to my historical average. Many investment advisors say this is a good number to use for rate of return, even with an above average risk portfolio.

While one can debate this, what standard deviation should I use if I reduce the rate of return to 7 percent. Do I keep the SD associated with the above average risk portfolio? And how exactly did you assign the various SD's to the various portfolios.

Thank you for your help. The fact that you have me thinking in these terms is so helpful to me as it is a real education and eye opener when one sees how much a little change can alter outcome.


Posts: 577
Joined: Thu Feb 28, 2008 6:48 pm

Re: Correct standard deviation

Post by jimr »

Unfortunately, there isn't one right answer to your question.

You can get some suggested values by googling 'model portfolio returns standard deviation' or something similar.

The values I use in the planner are an amalgam from doing similar research.

Posts: 1
Joined: Sat Jan 02, 2016 6:54 pm

Re: Correct standard deviation

Post by gdmoffitt »


below I pasted in some info from my notes..results of googling around for same information. In general my understanding is, across the broad market, the higher your risk profile the higher your volatility (standard deviation). Your risk profile can vary greatly depending on your investment mix, i.e., concentrations in sectors, geographical (US vs Emerging Markets for instance), your mix of equities vs bonds vs cash. ... -forecast/
Per this Forbes article long term 30 yr us large cap stocks return will be about 5%, 7% not inflation adjusted. Std Dev os around 19. international around 6%, bonds 10 yr investment grade about 3% real return, 5% with inflation, 9-10 Std Dev Estimates include inflation at 2%
This has calculator..annualized return s&p 500 1960 to 2006 is 10% not adjusted for inflation, 6% if adjusted. Std Dev 16%

compilation of different experts ... ed_returns
Interesting here that historical returns 1926-2005 10-12% nominal 20% std dev for large company stocks, corp bonds 6% 8.5% std dev. Bogle estimate from this year 10 yr estimate nominal us stocks 6% us bonds 3% ... 4Y1VN.dpbs
this guy says use estimate of 8% does not mention std dev amount. ... et-Returns
This Schwab page says for 2015 large caps 6.3%, bonds 3.3%, estimates inflation long term at 1.8%, says estimates lower because of lower expected inflation.

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