Tuesday, January 15, 2013

My 2012 Portfolio Return

It’s important for active investors to carefully measure their portfolio returns periodically. If you don’t compare your results to an index, how can you know if you’re wasting your time or not? Mental accounting allows many investors to lose to the index but think they’re actually beating it. The only trading I do now is to add new money to my portfolio and occasionally rebalance my holdings to my chosen target percentages. But, I like to calculate my yearly returns anyway.

My 2012 portfolio return was 8.03%. This is less than you’d expect from an index portfolio given 2012’s asset class returns. My portfolio is 100% in stocks and is actually only just over 90% in index ETFs. So, you might suspect that the non-indexed part must have performed poorly this year. But, this isn’t the case. The only individual stock I own is Berkshire Hathaway which returned 16% in 2012 measured in Canadian dollars.

So, what happened? To start with, some of the best asset classes for 2012 were real estate, but I have no real estate in my portfolio. I have a mortgage-free home that has increased in value substantially in recent years, but I don’t track its value in my portfolio. Another effect that hurt my returns a little is that I have a modest small-cap tilt in my ETFs, and Canadian small caps actually lost a little money this year. A third effect was that I happened to add new money to my portfolio at a stock-market high point in the year.

None of these effects were large by themselves, but they resulted in a modest return this year of only 8%. Just to be clear, I did no active trading during the year. I just kept my portfolio percentages in line with rebalancing, reinvesting dividends, and adding new money. Holding Berkshire Hathaway stock counts as active investing, but I just held the shares through the year.

After my 2012 results, you may wonder: am I going to pile my money into real estate? Nope. Am I going to sell off my small-cap ETFs? Nope. Am I going to try to time my entry of new money into my portfolio better? Nope. I’m going to stick with my current plan and just add new money whenever I have money to add.

For many years I was an active investor. Have a look at my results from 1995 to 2011 compared to an index benchmark to see how I performed. I believe my results were just luck, which is why I now spend my time on more interesting pursuits than scrutinizing annual reports.

4 comments:

  1. As I have told you, becoming a slum lord is the best way to assure you become filthy rich, and hated by all of humanity, but you won't care because you will have the riches of the ages at your finger tips. Never mind having to deal with asinine tenants who don't care about your property or such, just buy an ETF REIT and you can enjoy the money without all the annoying part of actually owning land, or materials.

    At least you don't have any GOOD DEBT!!!

    Tuesday morning Rant, Caj out!

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  2. Guessing you used XIRR() to calculate 2012's return! How did your 8% do vs. your index benchmark figures that you applied to measure 1995-2011, when adjusted for weightings and results in 2012? Keep up the good work!

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  3. @Matt: Actually, I didn't know about the XIRR() function -- I had only seen IRR() when I created my spreadsheet. So, I calculated the equivalent of XIRR() myself. But I've now checked that my results match XIRR().

    Good question about comparing to benchmarks. My 2012 results did just slightly better than the benchmark. But this is because the only individual stock I own is Berkshire Hathaway, and it had a good year. Excluding Berkshire, my portfolio matches the benchmark (less modest fees). So, there isn't much point in comparing to a benchmark any more other than to note how well Berkshire did relative to U.S. large caps.

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  4. At least you have a good "point of reference" for when you check the returns of your portfolio in the next few years. It will be a bit easier for you to make some sort of finance modelling chart to see how your portfolio will go in reference to current market trends.

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