Thursday, January 21, 2021

My Investment Return for 2020

Last year I said I wasn’t counting on 2020 delivering another year of double-digit returns.  Well, despite a wild ride in the stock market, I wasn’t too far from double digits with a return of 7.7%.  This almost exactly matches my 2020 benchmark return of 7.6%.

My return is somewhat lower than 2020 stock market returns because I’m now retired and have 5 years worth of my safe spending level in a combination of savings accounts, GICs, and short-term bonds.  This amounts to about 20% of my portfolio, and the rest is in stocks (see here for more detail on my holdings and how I run my portfolio).

There were two main factors that determined how well my portfolio performed relative to my benchmark.  The first is that because I’m living off my savings, the returns from early in the year are slightly over-weighted compared to later in the year.  So, the stock market crash brought my portfolio’s returns down more than my benchmark’s returns.  The second factor is that because there was so much stock market volatility, my threshold rebalancing plan gave unusually high added returns.  These two factors mostly offset each other.

The following chart shows my cumulative investment results since 1994 adjusted for inflation.

That big bump in 1999 was the result of reckless portfolio concentration that happened to work out well.  I could just as easily have been wiped out.  I won’t make that mistake again.

For about the past decade, my returns have closely matched my benchmark return because I've been committed to index investing during that time.

As usual, I have no idea what 2021 will bring, but my fixed income allocation will serve to moderate any extreme returns the stock markets give us.

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