Each year I calculate my portfolio’s overall rate of return and compare it to an appropriate benchmark. Whether you’re a stock picker or an indexer, I think this is an important exercise to make sure you’re not getting worse results than a dead-simple indexing strategy. Even indexers get the benefit of making sure their portfolios don’t have any hidden leaks.
My family’s returns still don’t exactly match the benchmark because my wife still holds a small amount of Berkshire Hathaway stock. She’s slowly selling it off each year to spread out the capital gains income.
This year our total portfolio earned a 7.63% return. Because I measure my returns in Canadian dollars, this year’s return benefited from the drop in the Canadian dollar relative to the U.S. dollar. So, Canadian stocks performed poorly, but U.S. stocks performed well (in Canadian dollars). When you’re well-diversified, there are always parts of your portfolio performing well and other parts poorly.
Here is my complete returns history:
I underperformed my benchmark by nearly 1% this year. This is because Berkshire Hathaway underperformed. Despite my respect for Warren Buffett and Charlie Munger, I’m looking forward to selling the last shares of any individual stock my wife and I own.
Looking over my history, you’ll note the unbelievably good 1999. That 192% is not a misprint. Over the entire period my compound average return beat the benchmark by 3.24%. But if we eliminate 1999, I lose to the benchmark by 1.00%. One huge piece of luck made up for a lot of mediocrity.
I consider the period from 2000-2009 where I frittered away much of 1999 gains to be what I should expect if I take up stock picking again. That’s why I’ve been an indexer for about 6 years now. I’m happy to have been lucky, but I’m not taking any more foolish chances.
Every stock-picker needs to make a choice. If returns matter more than your ego, then you should compare your returns to a benchmark. If protecting your investing ego is more important to you than returns, then keep your head firmly planted in the sand.