Tuesday, January 21, 2020

My Investment Return for 2019

In 2019, my investment return was 15.8%. This sounds good in isolation, but withers when we consider that U.S. stocks were up over 30%. So, is my investment approach a failure? Hardly, as I’ll explain.

To begin with, when you diversify, you’ll always have some part of your portfolio that performs better than other parts. Because I can’t predict which investment will work out best in a given year, I’m best off diversifying.

So, why did my return trail U.S. stock returns by so much? There were many factors. One is that I measure my returns in Canadian dollars. Because the Canadian dollar rose in 2019, U.S. stocks rose by less than 30% when measured in Canadian dollars.

Another factor that reduced my return was that other asset classes didn’t perform as well as U.S. stock indexes. Canadian and foreign stocks didn’t do as well, and I have a small cap value tilt that didn’t do as well.

Another drag on my returns comes from the fact that I’m retired and keep 5 years of spending in fixed income, including high-interest savings accounts, GICs, and short-term Canadian government bonds. This is nearly 20% of my portfolio, and it makes less than 3% interest.

All these factors apply equally well to my computed benchmark. But a final factor is that I had some bad luck in the timing of adding new money to my portfolio. This new money near mid-year missed the runup in stock prices over the first 4 months of the year. I use time-weighted returns for my benchmark, so this year my portfolio’s internal rate of return (IRR) trailed the benchmark by about 0.6%.

The following chart shows my cumulative 25-year investment results in “real” terms, which means after reducing the returns by the amount of inflation.



So, each dollar that has stayed in my portfolio for the full 25 years has increased in buying power by more than a factor of 7. That’s about double the rise in my benchmark, mainly because I had an unbelievably lucky year in 1999.

I have no idea what 2020 will bring, but I’m not counting on another year of double-digit returns. I’ll remain diversified and maintain my cash buffer to live on.

2 comments:

  1. Seem to recall you have some of your US allocation in small value. That would be another factor.

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    1. @BHCh: Yup, I mentioned that at the end of the 4th paragraph.

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