Raw return numbers are seductive. When someone tells you a strategy returned 47.38% CAGR over 19 years, it's natural to focus on the reward. But returns without context are meaningless. A 50% annual return that came from a coin-flip-style strategy that also had a 70% chance of losing 80% in any given year isn't a good strategy — it's a lottery ticket.
The Sharpe ratio is the most widely used tool for putting returns in context. It answers the question: how much return did you earn per unit of risk?
The Formula (Without the Maths)
The Sharpe ratio is:
(Portfolio Return − Risk-Free Rate) ÷ Portfolio Volatility
In plain English: take your returns, subtract what you could have earned risk-free (e.g., US Treasury bills), then divide by how wildly your returns swung around. A higher number means more return per unit of volatility — a more efficient use of risk.
Interpreting the Numbers
- —Below 0.5 — poor. You're taking on a lot of risk for modest returns.
- —0.5–1.0 — acceptable. Roughly where a simple buy-and-hold S&P 500 investment sits over most periods.
- —1.0–1.5 — good. Meaningful outperformance on a risk-adjusted basis.
- —Above 1.5 — exceptional. Rare for real-world strategies with liquid assets.
The Momentum Capital Balanced mode has a Sharpe ratio of 1.160. Growth mode: 1.064. Both sit comfortably in the "good" range — the high CAGR is not being earned through reckless volatility.
Why This Matters More Than CAGR Alone
Two strategies can have identical 5-year CAGRs with completely different risk profiles. Strategy A earns +15% every year like clockwork. Strategy B earns +60%, −30%, +40%, −10%, +60%. Both compound to roughly the same 5-year result, but Strategy B required holding through a 30% drawdown — which most investors won't actually do. They sell at the bottom.
A high Sharpe ratio tells you the returns came from a consistent, controllable process — not from taking maximum risk and hoping it worked out. That consistency is what makes a strategy actually followable in real life.
The Sharpe Ratio Isn't Perfect
Every metric has weaknesses. The Sharpe ratio treats upside and downside volatility the same — a strategy that has large positive return spikes gets "penalised" for volatility even though those spikes are good. The Sortino ratio addresses this by only counting downside volatility, but is less widely understood.
The Sharpe ratio also assumes normally distributed returns — which momentum strategies don't always produce. Strong trend-following returns often have fat tails (more extreme outcomes in both directions than a normal distribution would predict).
Use Sharpe as one input, not the only one. Pair it with max drawdown (−47.3% for Balanced mode) and crisis-period returns to get a full picture.
Reading the Momentum Capital Numbers Together
47.38%
CAGR
19-year compounded
1.160
Sharpe ratio
Return per unit risk
−47.3%
Max drawdown
Worst peak-to-trough
−4.6%
2008 return
vs SPY −40.4%
The 47.38% CAGR is the headline. The 1.160 Sharpe says it was earned efficiently. The −47.3% max drawdown shows the worst-case scenario clearly — not hidden. The 2008 crisis return of −4.6% confirms the strategy didn't just get lucky in bull markets.
These numbers together paint a picture of a strategy that earns high returns, takes risk, but takes it intentionally and systematically — with a defined process for limiting exposure when conditions deteriorate.
See the full performance breakdown, including the 19-year equity curve and year-by-year regime analysis.