Thursday, January 18, 2018

My Investment Return for 2017

Stock markets gave us above-average returns again this year, even measured in Canadian dollars that rose in value relative to U.S. dollars during 2017. My internal rate of return (IRR) that takes into account cash flows was 12.17%.

A big change for me this year is that at mid-year I retired from my job. It was a tough decision to walk away from a comfortable income, but the family portfolio sits at about 35% above what I calculate we’ll need to make it to age 100. This is a pretty healthy margin in case the stock market crashes, perhaps even healthy enough by my wife’s standards.

I don’t know if I’ll stay retired, but I seriously doubt I’ll ever work full-time again. I may do consulting work if the mood strikes and the work is interesting.

With retirement comes some fixed-income investments. I’ve written before about my intention to keep 5 years’ worth of family spending in safe investments. So, my portfolio that used to be 100% stocks now contains cash and GICs. The percentage in cash will grow with my age according to my spreadsheet calculations.

My benchmark changed for this year as well. In addition to fixed allocations to exchange-traded funds VCN, VTI, VBR, and VXUS, my benchmark has an allocation to cash. My benchmark return for 2017 was 10.60%. My actual return was higher primarily because I was slow in selling stocks to create cash. My returns were boosted by the ever-rising stock markets. If stocks had crashed, I could have lost out by not filling my cash allocation immediately.

I have a spreadsheet set up that dictates all my actions with the ETFs in my portfolio. I do this to eliminate making my own foolish choices in the moment. I haven’t yet automated the cash part of my portfolio. This happened to work out well for me this year, but I prefer to automate everything and wait for my spreadsheet to tell me what to do.

Here’s my cumulative real return history (subtracting out inflation) on a log chart:


I had a spectacularly lucky 1999 where I took a wild chance and won. For the next decade I gave away some of these gains, and for the last several years my indexed portfolio’s actual returns haven’t deviated much from my benchmark returns. It’s good to know that the money I had invested in 1994 has grown to the point where it can buy 7 times as many loaves of bread.

Over my investing history, my compound real return (which factors out inflation) has been 8.72% annually. I have outperformed my benchmark by a compound average of 3.02% annually. Both figures are almost certain to drop in the coming years. For planning purposes, I assume that my stocks will average 4% above inflation, and that cash will just match inflation.

It’s inevitable that your portfolio actions won’t exactly match your investment plan, even if you’re an indexer. In part, I do these calculations to see whether the deviations from my plan are costing me money. When you think you’re being clever, it’s important to see if in reality you’re being dumb, unless protecting your ego is more important to you than money.

22 comments:

  1. Congrats, on both the performance & the retirement from the 9-5. If you don't mind me asking, what would the "35% above what I calculate we’ll need to make it to age 100" correspond to in terms of your Withdrawal Rate?
    Curious for my own scenario, as I am always questioning when enough will be enough. (I may have "one more year syndrome")

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    1. @Stax: My spreadsheet calculates a safe monthly spending rate (after taking into account taxes and assuming inflation increases every year), and this rate is about 35% higher than what my family spends now.

      I understand the "one more year syndrome". I'd be nervous right now if I had no buffer just because bond and stock prices are so elevated. That's not a prediction, but a decade-long bull run has to end sometime.

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  2. Way to go Michael in surpassing your retirement goal! I'm in a similar situation but haven't pulled the plug on full time work yet. Markets are pretty frothy right now though, even with half of my original retirement goal in fixed income I've gone from 30% to 40% over my target in the last 3 months. So I don't think of it as much padding, markets could well be 40% overvalued, only a 25% drop and I'd be pretty much back at my target.

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    1. @Greg: I worried about the same thing. But I think I have enough buffer, especially since my spending level calculation includes years where I was still supporting my sons.

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  3. If you were starting an investment portfolio now, would you still choose VTI, or would you save yourself the hassle of Norbert gambit and use one of the Canadian listed US index ETFs now that their cost has come down?

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    1. @John: Interesting question. I think I'd still use VTI, VBR, and VXUS in anticipation of my portfolio growing larger. The MER savings are one reason, but eliminating U.S. dividend withholding taxes in RRSPs currently saves me thousands per year.

      I certainly understand why others would make a different choice. For the most part, when I help family with their investments, I stick to VCN and VXC for the stock portion of their portfolios.

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  4. Congrats on the retirement. I didn't know that fact before you stated it just now.
    I was wondering why you use VTI and VXUS, and not simplified it to just VT. Is it that the lower fees on VTI nets you some small savings? Or is it for another reason?

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    1. @Lance: There were a couple of reasons, but I could easily see making different choices. I wanted to control my allocation to U.S. stocks because I wanted to be slightly overweight U.S. stocks to reflect the fact that I spend a lot of time in the U.S. I also wanted to be able to rebalance between U.S. and non-U.S. stocks should they be less than fully correlated. I'm not sure these are really very good reasons, but I find that managing 4 ETFs has been easy enough.

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  5. Let me add my congrats! Good for you! I hope that you continue to post here as you make the transition.

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    1. @Garth: Thanks. I'm likely to be posting more often rather than less, but I make no promises. The transition has felt quite natural so far. I tend to have many projects on the go at once, so I still feel like there aren't enough hours in the day.

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  6. Big congrats Michael on this next adventure from a long time reader. Look forward to hearing more about it in the months and years to come.

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  7. Congrats!

    Speaking of one more year syndrome, was there anything at work that also helped prompt it? With my FIL, he was financially ready to retire by ~60, but wanted to keep working to 65, then at 64 called it quits when they moved his office and increased his commute (and also gave a crappy new desk).

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    1. @Potato: Thanks! There was a big reorg that negatively affected my C-level boss. This was going to make it harder to get support for some product improvements I wanted to make. I could have continued easily enough, but I was already on the edge about retiring. These events just made it easier to pull the trigger.

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  8. What was your ‘wild chance’ that you took in 1999 that paid off so handsomely?

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    1. @David: It was a huge investment in a hi-tech start-up whose stock exploded. It could just as easily have gone to zero before I sold anything.

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  9. Congratulations Michael! What will you do with all your free time?

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    1. @Kanwal: Thanks! I have no shortage of personal projects, including writing this blog and helping many of my older family members with their finances.

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