Portfolio One – Eight Year Performance Milestone

From today’s WSJ on November 14th

For the 10-year period ended Sept 30, stocks, as measured by the S&P 500 stock index delivered an annual average return of minus 0.2%

Measuring performance is actually pretty hard. It is one thing to just have a “lump” of money and then re-visit it 10 years later, adding up all of the dividends and / or interest received and viewing its current value as opposed to the original purchase price. That is the simplest example.

More realistic examples have discrete lumps of money added in over the years. Then each of those investments accumulate into the final total, but they have been invested over varying years, so they will have different percentage returns.

For this on Portfolio 1, which actually is about 8 years old, a bit shorter than the 10 years listed above, I used IRR to determine an annual return of 4.6%

If you go to the “cash flows” tab on the associated Excel 2007 worksheet, you can see how the IRR is calculated. You take the annual investments, which are broken out between the custodian (me) and the beneficiary. Then you put the current total portfolio value in the last column and through the miracle of excel you can calculate the internal rate of return, which is a reasonable proxy for an annual return, that we earned with this portfolio.

I am proud of the returns that we have achieved with this fund. Each of the 5 funds I run have different characteristics because each trustee chose different stocks each year from the list of 6 that I provided. And then due to varying circumstances based on those choices, I was able to make sales when the individual stocks had appreciated to a level the I found to be high, or a sale if I felt that the stock was going to be a poor performer.

What I do that your broker won’t do is explain what WOULD have happened had we not sold a particular stock. I keep tracking their performance going forward (there also is the avoided dividends if you are getting extremely detailed, but those won’t move the needle that much). Of all the stocks I’ve sold off, none have risen above the sale price, except for Amazon which we bought way back for $14 and then sold off in two different instances at $90. Amazon is currently above $120 nowadays but that is the only outlier. In addition, I am still happy with the sale because we diversified a bit and bought P&G way back which has been a strong performer with a good dividend.

One thing about performance, though, is it will all turn in a plunge. In the depths of the crash in 2008-9 this portfolio was flat or had an aggregate slightly negative return. Need to periodically watch the stocks and have a strategy for each one.

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