Benchmarking Q3 2006 Results YTD
How do your investment returns stack up against its “asset allocatio
Oct 2, 2006
October 2, 2006
Benchmarking
When trying to figure out how well you are doing managing your money, you need to know how to benchmark your results. There are many ways to benchmark your performance. The simplest is to compare your results and asset allocation to how an ideal portfolio made up of a total stock market fund and a total bond market fund did. This article shows you how to calculate what I call your "Asset Allocation Benchmark." With this, you can see how you did managing your own portfolio. If you under perform, then you should look for help or at least simplify with index funds to get better returns for less work and expense.
The formula is {[E%x(1+VTS%/100)]+B%x(1+VTB%/100)]-1}x100%
Note:
- E% = Percentage of portfolio in equities
- B% = Percentage of portfolio in fixed income (CDs, Bonds and Money funds)
- VTS% = Vanguard's Total Stock Market Index Fund % gain
- VTB% = Vanguard's Total Bond Market Index Fund % gain
- YTD = Year-to-date through 9/30/06, the end of Q3 2006.
Lets look at the benchmark data:
- Vanguard's Total Bond Fund is up 2.9% YTD
- Vanguard's Total Stock Market Fund is up 7.9% YTD
So a 70:30 equities:fixed benchmark would be up 6.4% YTD
{[(0.70x1.079)+(0.30x1.029)]-1}x100%={1.064-1}x100%=6.4%
Likewise, a 50:50 "balanced" benchmark would be up 5.4% YTD
{[(0.50x1.079)+(0.50x1.029)]-1}x100%=5.4%
Lets look at some of my returns and compare them to their "Asset Allocation Benchmarks."
- I am up about 7.3% in my newsletter Explore Portfolio and
- I am up 6.7% in my own investment portfolio (not counting home appreciation).
- Both are about 70:30 equites:fixed
My 70:30 benchmark is up 6.4% YTD so my newsletter explore and personal portfolio returns beat their "asset allocation benchmarks" by 0.9% and 0.3% respectively.
Warnings
- Remember to subtract any money from your final results so you don't count savings as "investment gains." For example, if you started with $100,000, added $4,000 in savings and finished the year with $111,000, then your adjusted return would be 7% ($111,000-$100,000-$4,000)/($100,000)x100%
- Remember to add back any money you took out of your portfolio if you are retired or semi retired and using the portfolio to fund your semi retirement. For example, if your portfolio went up 3% and you took out 4% of your starting value to live on, then your adjusted return 3%+4%=7%.
Examples
Lets see how my core portfolios have done:
- My newsletter CORE Conservative Portfolio is up 5.6% YTD (50:50 & Beta=0.5)
Benchmark = {[(0.50x1.079)+(0.50x1.029)]-1}x100%=5.4%
- My newsletter CORE Aggressive Portfolio is up 7.2% YTD (80:20 & Beta=0.8)
Benchmark = {[(0.80x1.079)+(0.50x1.029)]-1}x100%=6.9%
My conservative core portfolio beat the benchmark by 0.2% and my aggressive core portfolio beat its benchmark by 0.3%. This sort of short-term comparison of returns can be meaningless, but it is fun to look at none-the-less.
Remember, what really matters is the long-term results. One stock doing well one year then giving back half its gains the next can really distort year-to-year returns but the longer term results should filter this sort of noise.
For example, I my explore portfolio was up about 13% in 2005 while the DJIA was down 0.6% and the S&P500 was only up 4.8%. Some of my 2005 out performance came from GeoGlobal Resources gaining over 1,400% last year. GGR corrected this year, as one would expect after going from $1 to $15 in under a year, so GGR has been a drag on my returns in 2006 despite selling more than half my shares while it was higher. Longer term, say from the start of 2005 to now, GGR is still up over 475% and it helps my more significant long term out performance.
Mark Hulbert, a writer who follows the big name newsletters, says you should look at a minimum of 5 years to judge performance of newsletters and a ten year period is even better. The same is true for managed mutual funds. That is look at long-term results. Even though past performance is no guarantee of future results, why start with a managed fund that has poor long term performance against its proper benchmark?
Benchmarking for the longer term
Later this month I will write an article showing the performance of this "Two Vanguard index fund Core Portfolio" over many years so you can benchmark your longer term results to this portfolio using the article.
Please take the poll "What is your "investment portfolio" asset allocation to equities for Q4, 2006?" on our main page. Scroll down to the Poll in the middle of the page.
Questions and Discussion
Ask questions about and discuss this article in our Asset Allocation Discussion Forum
Free Charts and Other Stuff
Since beating the market is hard for most to do, I recommend a "Core and Explore" approach to investing. Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mutual fund portfolio and then EXPLORE with the remainder. To build your core portfolio, I suggest a diversified basket of index funds.
I welcome more questions and suggestions for future articles at Kirk's Market Thoughts.
Kirk Lindstrom:
DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.
