The investment goal of the Small Trades Portfolio is to outperform its benchmark index, the Standard & Poor’s 500 Total Return. Regretfully, this has not happened (chart).
The chart compares the growth of $1.00 invested in the portfolio to a theoretical investment in its benchmark index and the inflation of U.S. consumer prices. A decline of the benchmark during the 2008 Recession recovered in 2012 and grew to $1.66 (66% above baseline) by the end of 2015. But the portfolio declined and never fully recovered. Revised operations after the Recession managed to stabilize the portfolio by reallocating 80% of the portfolio’s principal to exchange-traded funds (ETFs). The ETFs are invested in underperforming asset classes that will eventually recover.
There are encouraging signs of investment performance found in the trends of compound annual growth rates (next chart) and stock performance (subsequent chart).
The compound annual growth rates of the benchmark index are leveling off while those of the portfolio are rising.
Revisions in my investment philosophy for stocks also show an encouraging response. For every $1.00 invested in the portfolio on 12/31/2013, the portfolio’s stocks outperformed the benchmark index and portfolio ETFs for two successive years.
The portfolio is intentionally overweighted by index ETFs. Among these, the equities ETF (ticker: VT) has 75% of holdings in developed markets and 25% in emerging markets. The returns from emerging markets were disappointing due to economic and political factors in foreign countries. The 2015 decline of gold prices was expected, given the global deflation of prices.
I prefer to invest in healthy emerging markets and when that occurs, I will trade the world-market ETF (ticker: VT) to a riskier emerging-market ETF (ticker: VWO). A continued decline of gold prices will likely cause me to rebalance the ETFs to equal portions of 25% among four asset classes of emerging markets equities, U.S. real estate, U.S. bonds, and gold bullion. 25% allocations of emerging markets equities, U.S. real estate, gold bullion, and U.S. bonds collectively impose a higher risk-return quality to the ETF portfolio compared to a 60:40 allocation of U.S. stocks and bonds.
My investment strategy for stocks is evolving from placing conditional trading orders on cyclic stocks to buying good growth stocks for the long term.
Douglas R. Knight