Analyzing Performance – Portfolio One

Background on Portfolio One

The first portfolio of my trust funds was set up right after the attack in September, 2001.  It seemed to be an inauspicious time to invest in stocks.  However, since these trust funds have a long time horizon (they start when the beneficiary is around 12 or so years in age) they should have a higher risk tolerance than a stock fund for someone later in life.

At the time I started the first fund, I was a confirmed “buy and hold” investor.  By this I meant that I intended to little or no “pruning” of the portfolio and intended to hold stocks until the fund’s control transferred over to the beneficiary.

While I still am generally of this temperament, over the years I did start selling some stocks when I believed they reached a “peak”  value and selling some stocks when I believed that they were at risk of dire consequences.

Investment into Portfolio One:

The first year (2001) began with an investment of $500 and then increased by $1500 for each year thereafter ($1000 from myself, the custodian, and $500 from the beneficiary).   There was also a special $1000 donation when the beneficiary graduated from high school.  Thus during the period 2001-9 (prior to this years’ investment round) the beneficiary has invested $3500 and the custodian has invested $8500, for a total of $12,000.

The investment typically involved purchasing 2 stocks / year, in amounts of approximately $700 / each (because brokerage commission fees and other investment fees also must be taken out of these funds).  In later years the investments got larger, because of re-investment of stock proceeds, dividends, and interest income.

The fund currently holds 13 stocks, whose market value varies between $436 on the low end to $1560 on the high end.  The average amount is approximately $900, for a total value of $12,265.  The fund also holds $1900 in cash; this cash position has increased due to volatility in the markets and the fact that the beneficiary is reaching an age where we might need access to some amount of cash and I’d rather have it “on hand” than have to liquidate a stock.

Overall Performance for Portfolio One:

Portfolio One overall has returned approximately 18% on the $12,000 invested over this 9 year period.  Until the recent market run up the return, overall, was slightly negative.  The fund is worth $2205 more than was invested.

This return is impressive given the overall poor returns in the equity markets from 2001-9.  Note that these investments were put in roughly equal installments during the period, so you can’t just compare it with a “lump” of money invested in 2001 against the return through 2009.  Also, this is a “real world” example so little items like commissions and fees need to be compared as well (this return wasn’t impacted by taxes because they were paid outside of this analysis if there were gains / losses in a given year).

Specific Analysis of Performance – Dividends:

During the analysis of this portfolio special effort was placed to track the performance of various components and their impacts on returns.  This analysis was done by creating a specific excel model which is included along with this post (at the bottom).

Dividends provided a total return of $1,135 during this period.  Dividend returns do matter during longer periods of analysis, and heavy dividend paying stocks provided much of this total.  AEP, a utility stock (which currently has a yield > 5%) provided $244 of dividends, Procter & Gamble, the consumer products company, provided $210 of dividends, and other dividend paying stocks made up the balance.  As of the time of this post, dividends made up approximately 50% of total returns, but this number varies significantly with the total portfolio gain – it was as low as 25% prior to last October’s market swoon.

Specific Analysis of Performance – Gains & Losses:

Gains and losses are the most complex component to analyze.  As you buy or sell a stock you incur fees, potential tax implications, and you change your portfolio performance depending on the characteristics of what you are buying and what you are selling.  For example, one of my earliest “sales” was Amazon, for a big gain (relative to the size of the portfolio, at least) and then I replaced it with Procter and Gamble.  Since Amazon paid no dividends and P&G does, this changed the character of my portfolio overall.

Here were the gains and losses by year:

– 2003 – Sold Amazon for gain of $1191

– 2005 – Sold Southwest Airlines for a loss of $3 and Tribune for a loss of $218

– 2007 – Sold Dell for a net loss of $132, Chuck E Cheese for a loss of $58, Sold Amazon for a gain of $1345, Sold China Mobile for a gain of $1276, sold ICICI bank for a gain of $541, and sold Netscout for a gain of $556.  None of those stocks with gains has approached the price where I sold it (their current prices are noted on the spreadsheet by stock).  Unfortunately, some of the reinvested stocks did poorly, as you can see in the 2007-8 purchases.  Generally I was trying to take advantage of a run-up if I thought stocks had hit a speculative peak

– 2008 – Sold GE for a loss of $589

– 2009 – Sold Cemex for a loss of $1235 (both GE and Cemex were stocks that I viewed as dangerous during the heat of the financial melt down since GE is mostly a finance company and Cemex is heavily indebted)

Specific Elements of Return – Fees:

This portfolio began in 2001.  At the time, fees for purchasing or selling a stock were a bit more than $20 / share.  These fees have declined over the years as pretty much everything has gone electronic and competition has increased.  Depending on your “total” package, some of the trades are less than $10 and some are free.  Over the life of the portfolio fees (plus a fee they used to levy on all accounts annually) total $667.

We track fees and commissions specifically even though they are often buried in the total cost (gain or loss) of a sale.  Brokerage firms don’t make a special effort to break out fees, usually, and you can probably guess why.

Given that the portfolio has had a decent amount of trades (26 purchases, 12 sales) this is a pretty low net amount of commissions, and reflects the declining cost / trade as mentioned above.  I believe that this rate is reasonable; if you put it in a typical mutual fund with around 1% / year expenses and had an average balance of $7000 (the midpoint of the current balance) with a life of 8 years you’d pay ($7000 * 1% or $70 / yr * 8 years = $560).  My point in this wasn’t to have the absolute lowest fees, but to work to minimize fees as a cost of the portfolio while not letting it impede trading where necessary.

Specific Elements of Performance – Interest Income:

Over the life of this fund (2001-9) interest rates generally have been very low.  In the beginning just enough cash was left to pay an occasional fee and commissions and to leave some “slack” in case the executed stock price was significantly different than the time when I put the order in.  Towards the end I started leaving more cash in the fund as the market gyrations became more and more significant – it seemed prudent.

Thus given that the balances don’t even average $1000 across the life of the fund in cash it makes sense that interest income was a relatively paltry $123 over 2001-9.  Current interest rates on money market accounts are minuscule… it is hard to imagine how important this portion of total return was during inflationary periods.  The return on your money market portion of your brokerage account is something to keep your eye on, but with such low rates the total return is very low regardless.


I think that portfolio one did well, all things considered.  The fees and expenses were kept reasonably in line, we earned a decent amount of dividends, and sales at peak provided more money to reinvest into other stocks.

On the downside, many of the reinvested stocks performed poorly; not necessarily worse than the market as a whole, but certainly worse than just leaving the money in the money market account (which almost everyone would have done in perfect hindsight).

The current portfolio is relatively balanced across sectors, size of companies, by country, and has 13 stocks which means a swoon in a single stock may hurt a lot but it won’t kill the account.  The current portfolio is also leaving some more money in cash which is new, but seems reasonable in the current environment and considering all factors of the fund.


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