The SmallTrades Portfolio holds cash, one exchange-traded fund (ETF), and a folder of stocks (figure 1).
The SmallTrades investment goal is to earn an annual rate of return —as measured by percentage change of market value over the year— which surpasses the performance of the benchmark Standard & Poors 500 Stock Index. In figure 1, one index-ETF creates 80% of the Portfolio’s market value with an expectation of matching the benchmark’s rate of return. The stocks contribute 20% of the market value with an expectation of outperforming the benchmark’s rate of return.
During 2020, the SmallTrades Portfolio earned an 18.2% rate of return compared to the Standard & Poors 500 Index’s 18.4% rate of return, thus matching the benchmark’s performance. In figure 2, the 12-year trend of performance was considerably better for the benchmark than the portfolio. The benchmark’s 9.8% compound annual growth rate (CAGR) exceeds the portfolio’s 2.8% CAGR. Portfolio mismanagement explains its underperformance.
In figure 3, the 7-year trend of performance was considerably better for the benchmark compared to the portfolio. The ETF performance coincided with that of the portfolio, indicating that the ETF is the major determinant of portfolio performance.
The “Great Recession” of 2007-08 devastated the Economy and the stock market as well as my portfolio. The effect of the “Recession” is seen in figure 2. The portfolio’s benchmark recovered higher and faster than it’s market value.
The stock market declined in the last quarter of 2018, which caused corresponding declines in market value of the portfolio’s ETFs and stocks (figure 3). That was a wakeup call to revise my investment strategy in 2019. First, I replaced the 4-sector group of ETFs (discussed in AR2018) with the current large-cap ETF (SCHW in fig 1). Second, I stopped using stop-loss orders to protect from losses and started using limit orders to capture large gains. The stop-loss orders focused on minimizing losses in a volatile market rather than seeking long-term gains. The result was a dramatic increase in performance of the portfolio, ETF, and stocks in 2019. The stock market crash of March 2020 and the Pandemic of 2020 combined to level the stock performance during 2020. I might have done better with different stocks, but that’s wishful thinking. Fortunately, the performace of the ETF protected the growth of my portfolio. My plan is to continue seeking long-term gains.
Copyright © 2021 Douglas R. Knight