How Well Has Our Investment Portfolio Performed?

I've now been closely tracking our investment portfolio on a monthly basis for over 3 years! Its been a lot of work and valuable for me personally as I can see the bigger picture each month. One realization that has stood out in this exercise is that while I tend to focus on a individual investment and how well its done near term, its often offset by declines in other areas of my portfolio and as a result don't have the positive impact I thought previously when taken as a whole.

Based on the monthly reporting my view has been that I have trailed our benchmark over the long term. While we have good investment performance months and bad months (that is comparing our portfolio returns to our benchmark), generally speaking the bad investment performance months have been more than the good months I believe. As a result I have somewhat dreaded analyzing the monthly data I've been collecting to put a multi year annual return perspective on this work.

I finally decided I needed to do some analysis since I now had 3 full calendar years of monthly data in place. Here is a summary of what I came up with based on our monthly investment reports from the past 3 years:

Period

My Portfolio

VTI Benchmark

2009 Return

33.89%

28.73%

2010 Return

12.91%

17.28%

2011 Return

-0.47%

1.00%

Avg Return*

14.59%

15.10%

* Annual return is calculated via geometric mean. **These annual investment returns for our portfolio were calculated using the Modified Dietz method based on the monthly investment performance data I've posted to this site. The annual returns for our benchmark were taken from Vanguard (posted here)and may vary slightly from the annual returns I would have calculated using the same data sets from our monthly reports because Vanguard likely uses a larger pool of data (daily, hourly, etc price changes) to calculate their returns.

What does it mean?
Well at first I was surprised it wasn't as bad as I expected, we are only trailing our benchmark by ~.5% in our return. However that's trailing ~.5% per year so that begins to add up. I think it fair to say there is not a compelling benefit in these results from me managing our portfolio. Rather there is a penalty for me currently managing our investments.

I hate the thought though of no longer actively managing our investment portfolio. I believe long term being able to get better returns will be key to reaching financial freedom and staying there.

If I still want to actively manage our investment portfolio perhaps I should reduce the size of what is actively managed and place a larger amount into index funds/ETFs. That would minimize any ongoing penalty until I can demonstrate that actively managing our portfolio can beat our benchmarks.

Thoughts?

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Comments (13)


Sir,

I have been reading your blog for years now and with this latest post, i thought I would make my first comment.

I strongly believe that you should abandon active management of your porfolio and transition to a passive index-based allocation. My reasons in favor of passive management are as follows:

1. It is cheaper. I cannot tell from your numbers if you are factoring in any account fees or brokerage fees for trades, but generally, if you buy index funds directly from the source (i.e. open an account at Vanguard) you will not pay any fees and also maintain low expense ratios. These fees DO add up and could save you in the long run by contributing to your overall return.

2. It takes less time. In several of your previous posts you have extolled the adage that "time is money." All of the time spent researching which stock to choose can now be given back to you! You can spend just minutes a month (if that) contributing to your indexes and then go play with your kid or find a new rental property

3. It is proven. Along with your anacdotal account through your own portfolio, the generally accepted Efficient-Market Hypothesis states that since markets are informattionaly efficient, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.


If what I have presented here has you thinking, I would strongly recommend a book that was co-written by the man who founded Vanguard, John Bogle. It is called "The Bogleheads' Guide to Retirement Planning". I know that the allure of active management is strong, but I dont believe that the time, cost and risk is worth it.

You can simply compare the returns without considering the risks in your portfolio and in VTI.

Besides, I think the more actively you manage your investment, the lower return you will get. Market is fundamentally unpredictable and active management only adds to the costs in terms of taxes, commission and bid/ask spread.

Finally, I think you are doing pretty well, you beat most of the mutual fund managers.

I believe you are trying to beat the professionals at their own game. Amoung the benefits of being large would be that they have access to information and resources that us little guys don't. If you want to beat them I believe you need to change the game. Like with real estate, businesses, or where ever you feel you have competitive advantage over someone else. There are many advantages to bring small. It is up to you to find those and maximize them for you. Most of these guys are limited to stocks and bonds, but you could buy almost anything. Last year you would have been better of cashing everything out and paying off debt which is a real return with little or no risk. Your returns are solid if you enjoy it, then do what you said, minimize what you control and learn. Once you prove to yourself that you can get the returns you want then switch back. If you do not enjoy it, then leave it to the markets and buy the index fund. Spend your time earning more to invest next year.

I agree with your other devotees who urge a passive, low-cost index fund approach, and would add to include periodic rebalancing into the strategy. You will essentially guarantee that your performance hits your benchmark, save hours of precious time and stress, and possibly get a bit of extra performance from rebalancing. Great strategies can be found in the books of William Bernstein (Intelligent Asset Allocator, Four Pillars of Investing), Yale Endowment manager David Swensen, or Mark Hebner at www.ifa.com.

I've been reading your blog for years, and it seems to be that you have an incredible knack for finding bargains, keeping household expenses in check, and for finding cashflow-positive real estate investments (and maybe for running Internet businesses!). Put your financial investment portfolio on autopilot, and have more time to reap rewards from bargain hunting and real estate, where your efforts really will add value.

I came to the exact same conclusion. This is why i moved to all passive low cost index etfs. Haven't looked back. If 79% of professional money managers don't beat their index, then what's makes me think i can. Numbers don't lie!

Keep in mind, the VTI only returned 15% because of the crises before. Now may not be a bad time to take some money off the table and paydown debt.
I personally just paid of my mortgage. The Jan/Feb run up may be the majority of the return this year.

What is the morningstar style box (3x3 matrix) breakdown (x-ray) of your portfolio and what is it for VTI? What is the asset allocation of cash, US stock, foreign stocks, and bonds. The composition of you portfolio as measured by these metrics will have more to do with your total long term return (excluding expenses) than your minor tweaking of the portfolio. Most large fund companies allow you access to these metrics via tools on their web sites. I use T. Rowe Price Portfolio Manager - a no cost web site.

Hi Two Million,

- I don't think that a 3 year sample is enough data to make any conclusions about your long term performance vs. the benchmark

- I don't believe that it is "cheaper" to buy index funds:
1) Buy and hold investors pay an up front transaction fee (which can be 2) You make your own decisions on when to buy or sell a stock based a personalized tax friendly strategy.

- I believe it is a coin flip on whether your stocks picks end up beating the broad market index.

If you enjoy doing it and have the time. I think you should continuing managing your own investments. Let someone else pay to put Mr. Mutual Fund Manager's kid through college.

What I do personally is do a balanced approach. 50% of my portfolio is in index funds and the other 50% I manage.


What is the "Beta" of your portfolio compared to VTI (which is 1.04)? You slightly "underperformed" the benchmark, but was your risk profile comparably lower (i.e. in less volatile stocks)? You should be getting paid to take on more risk than the market as a whole, so I try to keep that in mind when making comparisons to broad benchmarks.
Cheers,

From Investopedia:
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk

My performance for the past 5-6 years has consistently beat the S&P 500 index. I have a mix of passive ETFs, most of which is in SPY, and I also use them for international exposure. I have a very few number of individual stocks at any given time. The stocks range from growing companies to established dividend payers. I even have an old fashion mutual fund, which I bought 6 years ago but have never sold because I never had a reason to sell it.

I believe in putting your eggs into the fewest number of baskets as necessary but watching those baskets very closely. I read the 10-Qs and 10-K of each company I invest in or want to invest in. I research companies and carefully weigh my options. I've learned from my mistakes (such as not having trailing % stops in place). In my worse year I lost 30% of the portfolio value, but the S&P lost ~35% that same year. Last year I beat the S&P by about 7%. It definitely takes a lot of time and energy. But I believe you can consistently beat the market. To do so you have to be willing to invest the time and energy as well as have plenty of patience and not invest emotionally.

Abandon active management of stock/bond investments. The pros will do better and you will gain significantly by focusing your energy on other areas.

If you do choose to keep actively managing I would reduce your number of holdings to around 10 stocks. It's almost impossible to follow the around 40 stocks you have close enough for you to make good investment decisions.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,574,185

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