Portfolios Four and Five Start Up

We recently started portfolios four and five with the round of late summer investing. The process went per usual:

– each of the beneficiaries saved up $500
– we matched $1000 each
– we provided a list of 6 stocks to pick from
– each beneficiary picked 2 stocks from the list
– we purchased the stocks

Since it was a first time setup there were some additional steps in establishing the portfolio. I had to do some work to get the forms set up under my custodian umbrella with my brokerage firm. The firm waived some limits they had on the size of the account (usually they don’t set up brokerage accounts with only $1500) because it was part of my overall effort and because we will cross the $3000 barrier next year, anyways. The firm also was generous and waived some commissions for portfolios 4 and 5 since I had some free commissions left with my account (they originally charged for the commissions and then put the cash back in the money market account. I guess if I am super technical they are part of the basis but I will assume that they aren’t since it was returned).

I am not going to set up excel spreadsheets yet for them until we get another years’ worth of activity but am tracking them through that excellent google service that I mentioned in other posts.

Portfolio Three Performance – Three Rough Years

The third portfolio has a life of three years. These three years coincided with many of the markets toughest years and thus the returns on this portfolio have been the lowest of the three so far.

A total of $4500 has been invested in this portfolio over three years, and the current value is $3752, for a loss of $747. This represents a 17% loss, or an annual loss of approximately 9%. The beneficiary has invested $1500 and the custodian $3000, so at least the trustee is doing well with a value of $3752 vs. an investment of $1500.

This portfolio had one decent winner, China Mobile (we sold before the big drop), and two tough losses; one on ICICI bank (ticker IBN) from India which was sold at the peak of market turmoil (and since regained some of those losses) and also Nokia (NOK), which had losses and cut their dividend but we continue to hold.

With only 4 stocks in the portfolio (2 until recently) any portfolio in the early stages with this few stocks is subject to market gyrations. Portfolio Two now has 10 stocks and Portfolio Three has 15 stocks so they at least have more diversification across markets (generally 10 stocks means that you have decent diversification, as a “rule of thumb”).

Investing is a long term game and played with real money; so when you start investing in a bad market it can be stomach turning at times, especially for kids who see this as “real” money since they earned and saved their portion themselves. Given the time horizon of these trust funds in makes sense to stick with the volatility and continue to watch the markets and keep going rather than pulling out and putting the money into plain vanilla investments.

Portfolio Two Performance – Five Year Milestone

Portfolio One, as I noted above, has a ten year horizon and returned at an average rate of 4.6% over the ten year period.

Portfolio Two has a five year time horizon. Portfolio Two had a rougher ride because a longer portion of the time allotted fell during the “bust” period of the market. Portfolio Two barely ekes out a profit over this five year period, with a 5 year return effectively near zero.

This portfolio has had some big winners, including China Mobile and BHP which were sold for a gain, and some that were sold for a major loss, including Cemex out of Mexico and ICICI Bank (IBN) from India. We are still holding on to Nokia, even though it has an unrealized loss, because they seem to be a decent stock looking forward, and Diageo, partially because they just raised their dividend (which is a bullish sign).

From the beneficiary’s perspective, they put in $3000 so far, and it is worth $9100, so that is a significant return on their investment (ignoring the double match). This is good, but we hope to do better in the future than an effectively zero return over 5 years.

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.

Google Finance

One of my brothers asked about tracking performance for the newly created portfolios 4 and 5 for the nephews that just reached the age that I set up a trust fund for them for the first time. I suggested the Google Finance gadget, rather than logging in to the web site that physically holds the stocks in their brokerage account.

The Google Finance gadget is shown in a screen shot above. Every time I click in to see the stocks it seems like Google is improving performance and features on this tool.

This screen shows (most) of the critical facts about your stock – your # of shares and the price you paid for them (which makes up your cost basis, excluding commissions, which I track on my page so that I can be perfectly accurate for tax time), your cumulative unrealized gain or loss (you don’t actually realize the gain or loss until you sell the stock, once again net of commissions) and that day’s gains or losses.

Entering data is easy – you just need to put in the stock’s price, and the number of shares. “Unclick” the cash box, because it makes it more complex with dividends, and then after you’ve added all of your stocks just estimate the cash value in your brokerage account as of that day and there you have it, an easy way to see your stocks at a glance. Every so often you need to change the cash holdings at the bottom to track dividends, but that is about it for complexity.

There is a second tab that you can click that shows the 52 week high and low for your stock, plus other market facts like capitalization. About the only fact that they don’t include that would be useful is the dividend yield, but I am sure that some time I will log in and it will be there, too.

Also they link all of your stock picks to news feeds so that just news feeds that are linked to your selections come up when you click on the detail page. You can just view the “summary” of this portfolio without drilling in to the details on a custom version of your google home page.

Once again I like this better than logging in to the site because for some reason they don’t show my basis and unrealized gains and losses on the main tab, although they are improving, as well.

Purchasing Stocks for 2009

It is the season where we purchase stocks each year. At a high level the process is:

– kids earn their $500 during the course of the summer (some have jobs, or find other ways to save)
– after I receive the $500, I add $500 and match $500 for a total of $1500
– this $1500 gets deposited into the money market account linked to their brokerage account
– I send them (or post on this site) the six stocks to pick from for the current year
– each of them select 2 stocks
– based on the market price, I place the orders overnight, leaving enough extra in the account in case of market fluctuations at the open, plus room for some commissions
– then the orders get executed
– later, I update the performance of the overall portfolio

So far:
– Fund 4 (new) – selected SNP (8 shares), SI (7 shares)
– Fund 5 (new) – selected WMT (13 shares), NUE (14 shares)
– Fund 1 – selected TEVA, SNP – also looking to increase the position in either AEP or MSFT (waiting on directive)

Still waiting on picks for Funds 2 & 3, some times it takes a while to get in touch and talk through it with homework and other after school activities.

How to Track Performance

In a post analyzing the performance of Portfolio One (the longest-lived portfolio) I included an excel spreadsheet with performance information. This excel spreadsheet was built over a number of years and I refined it to include more and more relevant information and responses to questions asked by the beneficiaries of the portfolio.

At first I thought that I could get answers merely by reading the statements that I received from my brokerage firm; but over the years I realized that there was a lot of information that wasn’t readily available, for one reason or another. This information includes:

1 ) inception to date, how much of the portfolio has been spent on fees including any annual fees for the account and commissions on buys & sells
2 ) how much of the return is due to dividends, and what is the accumulated dividends for each stock
3 ) inception to date, how much interest income has been earned on the portion of the portfolio that wasn’t invested in stocks but sat in the interest bearing money market account (usually while waiting to select a stock or immediately after a sale until it is re-invested)
4 ) what is the return on each individual stock, determined as dividend income for that particular stock and any unrealized gain / loss on the change in market price based on today’s price against original cost
5 ) for stocks that are sold, what was the gain or loss on that stock, and was it a short term or long term capital gain (was it held more or less than 1 year)
6 ) for stocks that were sold, how has the stock price done since then? The kids liked to ask this question, basically trying to determine whether or not I was right when I told them to sell a particular stock
7 ) what is the current dividend yield on each stock in the portfolio
8 ) what is the return since inception on the portfolio – there is the easy “is it worth more than put in” but the much harder “what is the rate of return in percentage since inception” which is difficult because you need to determine the timing of each investment
9 ) for the current year, what is tax information needed including dividends earned, interest income, and short term and long term gains and losses from sales of stock

In order to account for this you need to get your statements and do a bunch of work, and track it in a spreadsheet. There may be a simple, off the shelf program that does all of this, but I don’t know what it is. Anyways the real effort is in pulling all the transactions off the statement and entering it – once you set up the spreadsheet it mostly calculates everything for you – so even starting with a canned program wouldn’t save too much time (unless it was directly auto-fed from your brokerage account).

Here are the steps I follow each time and some of the “checks and balances” I do to make sure that I don’t miss anything.

Steps to updating portfolio performance:

1 ) update the prices of stocks in the portfolio (on the “balance” tab). Delete any stocks from the balance that have been sold and make a note to add any stocks that have been purchased to the list. If the stock has split (rare), make a note of this and adjust the share total. Make sure the total dollars in the spreadsheet ties out to the total on the site for those stocks (net of new purchases)

2 ) For sells… go to the sells tab, put in the shares and price, and then calculate the gain or loss by matching the cell against the appropriate one on the “buy” tab (you will have to update the formula). Note if there were commissions or not – we show the loss INCLUDING the commission (which is how it is calculated for tax purposes, too) but we want it separate so that we can calculate total costs to date

3 ) For buys.. go to the buys tab, put in the price and cost and commission

4 ) Go to the dividends tab, and add in manually all of the dividends paid out for each of the stocks specifically. For foreign dividends, put them “net” of the overseas with holding and any fees (so that the amount ties to what is added to the money market) – if this were material, we would collect them separately. This is needed for foreign stocks

5 ) Go to the dividends tab and update the pivot table and make sure the total ties out and that each stock is only represented once (i.e. if there are misspellings you will have 2 exxons, for example)

6 ) Go to the MM transaction tab, and add the monthly interest from the money market fund (only)

7 ) Go to the MM pivot tab, and update the pivot table and make sure all of the money market transactions are picked up

8 ) Go to the MM balances tab, and update the balances to match the statement

9 ) Go to the summary tab. You will need to add a line for each purchase. Copy the formulas across and update them. You will need to eliminate every stock sold from the top part with formulas, and put it in the bottom part with sales. For sales, use the net loss / gain from the sale tab and put a note of what the price was when you bought it, when you sold it, and the current price now. You can see sold stocks because they will have a #REF where their price used to be, as a check.

Also on summary tab, update the dividends by linking each stock to the line in the pivot table by stock to the main tab. The total by stock (done manually) for dividends should total to the same total as the pivot table.

Update the heading to show the month. Then update the date in cell A2 – this moves the month held column which is used to calculate the # of months which is used for the return calculation.

CROSS CHECKS on main tab; that the sum of the dollars for stock value matches the total of the balances; that the total of dividends matches the total of dividends pivot.

10 ) On summary tab – look up the “yield” for dividends of every stock on yahoo. While you are at it, update the notes section for each stock with analysis.

For sold stocks – update where they are today, given the original price and the sales price. This is for Monday morning quarterbacking only.

11 ) update the date on the cash flows tab for rate of return – if you have a new cash inflow, adjust the formula by adding a column and checking to see if it is calculating properly

12 ) if it is time for tax treatment, show the gain / loss for sales in the fiscal year, the amount of interest earned, and the amount of dividends received. These 3 items all go onto the return