2021

January 26, 2022

My private SmallTrades Portfolio is a Roth Account in which I no longer make annual contributions and cash withdrawals. Calendar year 2021 marked the 14th year of active portfolio management.  Figure 1 shows the latest portions of year-end market value as 81% index-ETF, 18% U.S. stocks, and 1% money market. 

Fig 1.

Annual returns

My investment goal is to earn an annual rate of return above that of the benchmark Standard & Poors 500 Stock Index.  Unfortunately, the Portfolio usually underperforms the Benchmark.  

Fig 2.

Figure 2 presents the history of annual returns for the Portfolio (blue bars), portfolio holdings (yellow & red bars) and Benchmark (black bars).  In year 14, the Portfolio earned a 27% rate of return compared to the Benchmark’s 29% rate of return, thus underperforming the Standard & Poors 500 Index by a margin of 2%. The history of annual returns reveals devastating losses of market value in the first 6 years followed by encouraging gains in the last 8 years.  Speculation and hurried trading, augmented by the 2008 Recession in year 1, created multi-year losses.  After year 6, reduced speculation and slower trading produced multi-year gains.

14-year growth

Devastating losses of Portfolio value in the first 6 years precluded any chance of matching the cumulative growth of the Benchmark over 14 years.

Fig. 3.

Figure 3 displays the cumulative growth of annual returns as a chain of “unit” market values.  The unit market values of the portfolio (blue dots) are ratios of year-end market value to the initial market value at time 0.  After 14 years, the Portfolio’s compound annual growth rate reached 4% compared to the Benchmark’s 11%.

8-year growth 

To evaluate the cumulative growth of annual returns in the last 8 years, I reset the unit value to $1.00 at the end of year 6 and recalculated the succeeding unit values now displayed in figure 4.  

Fig. 4.

Less speculation coupled with longer holding periods enabled Stocks (red dots) to outperform the Benchmark (black dots) through year 10 and generally outperform the Portfolio (blue dots).  The Portfolio (blue dots) matched the performance of its ETF (yellow dots).  

Summary

Measurements of annual return and cumulative growth show that the SmallTrades Portfolio continues to underperform its Benchmark by a wide margin of 7% cumulative growth over 14 years.  The last 8 years produced encouraging results based on improvements in portfolio management.  To continue improving, but not wishing to leverage my investments, my choices are to invest in a growth index ETF and/or re-allocate assets to a higher portion of growth stocks in the portfolio.    

Copyright © 2021 Douglas R. Knight


2017

January 1, 2018

My SmallTrades Portfolio holds stocks and broad-market index ETFs (chart 1).

chart 1. SmallTrades Portfolio in 2017.

Chart 2 shows the diversification of ETFs as measured by percentages of year-end market values among ETF classes.

chart 2. Diversification of ETFs in 2017.

Chart 3 shows the diversification of stocks among 8 market sectors as measured by percentages of year-end market value for each stock sector and the ETFs.

Chart 3. Distribution of stocks and ETFs by market sectors.

Chart 4 shows the distribution of stocks according to market capitalization.

Chart 4. Combined market capitalizations.

Performance

My investment goal is to outperform the “Benchmark” Standard & Poors 500 Total Return Index, yet my portfolio has never outperformed the Benchmark (chart 5).

Chart 5. Portfolio performance.

Chart 5 shows growth trends for the benchmark (blue dashed line) and portfolio (solid blue line) since 2007 [the benchmark represents a passively managed, buy-and-hold investment; my portfolio is an actively managed investment].  On the Y axis, a unit value of $1.00 was assigned to both the total market value of the Portfolio and the Benchmark on December 31, 2007. Ratios of subsequent market- and benchmark values to the 2007 baseline are displayed line plots on the chart.

In 2014, my investment policy was modified to buy stocks of good companies and hold them for the long term. Chart 6 shows the result of my stock investments (red line) compared to the Benchmark Index (blue line) and ETF investments (red dashed line). The unit value of $1.00 was calculated on December 31, 2013. Since then, the stock group clearly outperformed the Benchmark and ETFs.

Chart 6. Stock and ETF performances.

Risk Management of ETFs

Broad-market index ETFs are primarily protected against stock losses by the passive management of investment portfolios which mimic the composition and performace of reputable market indices.

ETFs are secondarily protected by rebalancing significant allocation errors as described in the SmallTrades Portfolio’s strategies for risk management. In theory, a significant drift of asset classes occurs when one asset class surpasses a 24-28% allocation error. My preferred allocation of ETF market values is 30% stocks, 30% REITs, 20% bonds, and 20% gold bullion.

A perfect allocation of ETFs would result in 0% allocation error.  Furthermore, allocation errors would reflect disproportional gains or losses of market value.  Chart 7 shows the year-end allocation errors (blue bars) and error limits (red dashed lines) of my ETFs. There was growth of the Global Stocks ETF and decline of the remaining ETFs. Any allocation error that exceeds an error limit (red dashed line) should trigger trades that rebalance the ETFs to the preferred allocation.  My ETFs were not rebalanced in 2017.

Chart 7. ETF allocation errors in 2017.

Risk management of Stocks

My stocks are primarily protected against risks of steep loss by diversification of the market sectors, as illustrated in the preceding chart 3. The second line of defense is stop-loss orders.  In keeping with the investment goal of holding good stocks for the long run, I set ‘stops’ at a wide margin to prevent recent market fluctuations from triggering an unwanted sale.

Plan

The SmallTades Portfolio will continue to be actively managed for long term success. The ETFs will be rebalanced anytime there’s a 24% allocation error or a modification of the ETF holdings. In 2017, I failed to sell large cap stocks in order to buy good small cap and mid cap stocks. Consequently, 60% of the total market capitalization of my stock portfolio was in the Large Cap category.  In 2018, I would like to reduce the Large Cap category to 40% total market capitalization and boost the market capitalization of small- and mid cap stocks issued by good companies with potential growth of earnings.

Portfolio history

  1. On 12/31/2007, the portfolio held a group of actively managed mutual funds in a tax-deferred Roth account. Since then there have been no cash deposits or withdrawals and the portfolio still resides in a Roth account.
  2. During 2007-2010 the actively managed mutual funds were traded for stocks in an attempt to earn a 30% annual return by process of turning over short term ‘winners’.  Four mistakes led to a big loss:
  3. mistake #1: after a couple of short term capital gains from Lehman Brothers Inc., I ignored the dangers of the company’s large debt and lost $45,000 during Lehman’s decline to bankruptcy.
  4. mistake #2: substantial long term profits from good companies were lost by selling holdings for short term profits. My strategy was to earn a quick 30% in the first year and re-invest in the next winners. It was too difficult to identify the next winners.
  5. mistake #3: day-trading was a game of chance that I played and managed to break even; meanwhile, good stocks grew in value.
  6. mistake #4: a trial of investing in leveraged ETFs resulted in losses due to negative compounding.
  7. I abandoned the goal of a 30% annual return in 2012 by adopting a more realistic, but still aggressive, goal of outperforming the benchmark. That same year, I changed my investment strategy to that of holding a mixed portfolio of 80% broad-market index ETFs and 20% stocks for the long term. ‘Good’ companies attract and retain investors for many years. I will search for profitable companies with growth potential that are undervalued by the stock market. My search methods include reading reputable sources of business news, partiicipating in an investment club, using stock screeners, and attending investor conferences. Then I include and exclude stocks by reading analyst reports, financial statments, SEC filings, and market analyses. Valuation critieria help me decide if the stock price is worth paying.
  8. Prior to March, 2016, five ETFs were allocated to four asset classes with each asset class holding 25% of the combined market value. Since my retirement income didn’t depend on making withdrawals from the SmallTrades Portfolio, I increased my ETF exposures to global stocks and REITs by decreasing my exposures to investment-grade bonds and gold bullion. The new allocation rule was 30% stocks, 30% REITs, 20% bonds, and 20% gold. Any drift in allocation to a 24% error will be rebalanced.

Quarterly stock reviews

April 9, 2015

Every member of our investment club is asked to monitor one stock in the club’s portfolio.  We report the company’s progress and market performance following each filing of a quarterly earnings report (found in SEC Form 10-Q and/or news media).  Failure to do so could result in a loss of profit!

My assignment is the Oracle Corporation, a company that I voted against purchasing.  After we bought shares, I suggested that we place a stop order to “sell” if Oracle’s stock price went down.  But the club voted against my recommendation in the belief that Oracle is a classic buy-and-hold investment.  Now I’m beginning to accept the idea of holding Oracle for the long run.

Oracle’s industry challenges my understanding.  Oracle is a market-leading company that specializes in providing “enterprise” services to over 400,000 customers.  It’s “legacy service” is provided on-site.  Never mind trying to understand “enterprise” and “legacy service”, Oracle is now threatened by innovation and price wars.  Oracle must meet these threats or lose business.  That’s where the fun comes in.  Analysts report that Oracle, EMC, Salesforce.com, Amazon, Google, Microsoft, IBM, and Hewlett-Packard are locked in a battle for market shares of innovative cloud-based services.  The competitors are offering public and/or private clouds; how will they earn a profit from these offerings?  And what are the cloud spaces known as PaaS, SaaS, and IaaS?  My education is just starting.


April, 2014, I joined an investment club

May 15, 2014

I enjoy seeking short term returns from stocks. Active trading gives me the excuse to place crafty trading orders and check the market every day. The goal is to realize a profit from every stock in less than a year, resulting in a portfolio turnover rate of at least 100%. Read the rest of this entry »


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