Originally published January 3, 2021
It is that time of the year -time to review your portfolio. I understand from some of you that it’s difficult to do this, especially if you don’t take note of your balances on or around January 1. To make it even more difficult, most trading platforms do not provide a year-to-date function for performance. In addition, it’s even more complicated as some of you do not have fixed portfolios, you add or take out money for real-life needs. This makes it extremely difficult to calculate annual returns as the portfolio artificially changes due to inflows and outflows and it skews real organic growth.
There are things you can do to reconcile this situation, but that’s likely the subject of another article. My TD platform has similar issues as it only provides the returns for the last month… not so useful. In any event, I always note all my account balances in Canadian dollars on January 1st so that I have a reference as the new year plays out. Without this baseline to start off the year, it’s kind of like driving a car without a dashboard; you will have no clue how far or how fast you are traveling. Maybe you’re doing well, maybe you’re not, it’s hard to say. If you cannot tell how well you are doing, then how can you make successful investment decisions?
I am always trying to convince people to measure their performance mostly to create self-awareness, i.e., am I good or bad at this? By knowing how you are doing, you can adjust your strategy or alternatively, you can get out of the game and hold market ETFs. There is no shame in using a market ETF strategy. It’s the easy way to beat over 90% of all actively managed portfolios, you win by not playing.
My Blog/Newsletter as a Performance Tool
One of the main reasons why I write this newsletter is to keep myself honest. Investing is more a mind game against yourself than it is a game of math, economics, luck, or statistics. The natural response to underperforming is to ignore your losses since it makes you feel bad. But then how do you learn from your mistakes? The opposite is also true. If you overperform you get arrogant and ignore the possibility that you were just lucky and now that you believe that you are a market genius, you start taking higher risks. By putting my performance and strategies out there for all to see, I feel that I am more likely to create balanced portfolio strategies. In 2019, I underperformed by 3 points and made sure everyone knew about it (I nevertheless returned 28%, accomplishing my ultimate goal of a market like return).
2020 Performance
2020 was a great year for the portfolio, ending off with an overperformance of 7.75 % after taking into account the additional market dividends (about 2%), which need to be added to the SP500 to get the total return. As returns go, the portfolio’s 26% is very strong, however, what is most important is that I achieved my goal of a market-like return.
I have always said that I try to beat the market by 1-3% and not more as I would have to increase my risk to do better. You have to accept the same 1-3% expected beat as a potential loss because risk works both ways – standard deviation does not care if it’s positive or negative. I personally prefer not to accept deviations more than this in order to keep my returns market like should things go wrong. This year was an exception because of the pandemic, it only made sense to become aggressive and take advantage of bargain basement stock prices. The market could have continued to fall and stay down for a couple of years but we were lucky to have it bounce back so quickly and dramatically. This is why the portfolio overachieved. In a regular year, this type of overachievement would be highly unlikely.
This year was another good example of why it’s important to be diversified. The Toronto Stock Exchange (TSX) only returned about 2% so if you are solely playing a Canadian game, you have underperformed hugely from a global perspective. The world is a big place and there is no reason to have such a strong home bias. My portfolio has a little less than 20% in Canadian stocks. Certainly one day the Canadian Market will outperform when the right combination of financials and energy come back in favour, but generally, I would prefer to keep hitting single base runs year after year than waiting for that big Canadian home run.
Recent Purchase
I have added the Russell 2000 small cap ETF by Vanguard (VTWO) to the portfolio. After much research and listening to Paul Merriman’s podcasts, I am convinced that you can capture the small cap premium (small companies get better returns than big companies over time) safely by using an ETF. Paul particularly makes a case for small-cap value stocks, however, value generally has been underperforming against growth. So the Vanguard VTWO Russel 2000 ETF captures both. I have a 5% weighting at this point. This is another strategy to eke out some overperformance while keeping risk levels acceptable.
Going Forward
I still cannot see the future market direction, there is certainly a case for both the bull stance as well as the bear stance. The US political situation is fluid, there are pandemic considerations, China, excess cash, a new bull market, etc. I do not really know where it’s all going. Last year I predicted a low-teens return for 2020 and I was pretty close. At that time there were a lot of indicators that pointed to that type of return, but that being said, it’s much murkier this year so I continue to hold a mostly equally weighted, heavily diversified portfolio. I do plan to increase my exposure to foreign stocks i.e. not US or Canada as the portfolio has gotten a little too USA-centric.
How has your portfolio done?
Happy investing.
Marc’s Monthly Moves
| Buy | Sell |
| Vanguard Russell 2000 ETF (VTWO) |
Marc’s Portfolio YTD Performance
- Portfolio return 23.9% (Including currency losses)
- Portfolio return 26% (without currency losses)
- SP 500 return 16.26%
- SP500 total return 18.25% estimated
Portfolio beat SP500 by 7.75 points.
Money with Marc 