A few months back I wrote a piece on benchmarking your portfolio and why, at least to my mind, you should do this on a regular basis. The exercise can be both enlightening and in some cases, offer a hefty wake-up call to the more gambling style of investor who enjoys sporadic years of feast followed by famine.
As I have written before, an investor will almost certainly have an objective for investment; is it for a major purchase, possibly to fund your lifestyle, preparation for when you disembark from paid employment or possibly to leave a legacy inheritance behind you when the grim reaper calls. Whatever reason you have, life provides a continuous stream of opportunities for making mistakes, learning from those mistakes and hopefully improving or in many cases doing the same thing that has failed time and again in the hope that it will eventually work out. A wise chap by the name of Albert Einstein once said: “insanity is doing the same failing thing again and again and expecting a different result”. Just why do so many investors in all walks of life keep making the same mistakes over and over again and sadly never learning from those mistakes or even worse kidding themselves that they are learning when all they are doing is repeating them albeit less frequently. So, with benchmarking, provided you select high-quality investments to measure against, you can at least get an idea of how your approach is doing. I would go so far as to say even to get a feel if you are wasting your valuable time i.e. if you can’t beat the quality benchmarks over time then simply let those guys do the work for you, hand your money over to them and free up some valuable time to maybe do something in life that more suits your character.
Note, I did mention two key points here; quality benchmarks and time so let's be clear what I mean about both. Firstly quality benchmarks: now it is almost accepted convention to benchmark one's portfolio and indices and often as not that chosen index is the FTSE All Share Total Return. However, it is important to benchmark against something that suits your investment style e.g if your objective is a very low-risk growth return then why not measure against a normal interest rate return with your target being to do say 5% better than the bank to compensate for risk. On the other hand, if it’s simple good continuous growth, then you may choose like me, to benchmark against the likes of Henderson Small Co’s IT & Fundsmith.
Now to the concept of time; what do I really mean by time? Is it now you faired on a day, a week, a month, a year, five years of your investment lifetime? Well in my case I take almost zero interest in daily changes or weekly changes in portfolio value; it’s simple fairly meaningless background noise in my opinion that you will forget almost as quickly as you have assessed it. I take a passing interest in quarterly performance, a slightly higher interest in financial year performance and a real interest in five-year performance. I honestly reckon that apart from special situations and of course spread betting, that anything more frequent than quarterly almost qualifies as fluctuations within the baseline noise. Having said that, once out of the pool each morning, I check before the markets open the RNS announcements just to see if there is anything of note for a stock I hold such as a profits warning, a transformational positive business change, a trading statement etc. I find that real company RNS news coupled with fundamental and momentum as opposed to “Freddie the experts view” to be my chosen worthwhile investment style.
In my view, unless a stock is in a game-changing place and that could either be a positive or negative change, then any more frequent measuring than quarterly just causes anxiety. You have the exhilarating rush “lovely jubbly” of a good day which is far surpassed by the ”blues” you may feel from a bad day, so in my book why do it?
In the past, on the Whittler, I have stated that performance over a small time window; quarterly, six monthly or even yearly, means little. It’s been my belief for some time now that the minimum period to derive a meaningful “how am I doing” is a five year period. Now how does that fit with what I have blogged in the past? Your true performance will be measured though by the grim reaper and the executor of your estate: in the final reckoning, it’s as simple as that; touch sobering that one!
I do see and read many investors quoting on a very regular basis their returns; it may be daily performance ranging up to YTD or a calendar year. Myself I have always tended to offer financial year performance against a benchmark. However, I now question if there is any real value in doing that? It’s not a competition; I don’t have an ego to feed and show how clever or stupid I am and I strongly suspect that in reality most investors simply care about their own performance rather than the claimed performance quoted by some investor in cyberspace. In fact, I don’t intend to quote any percentage in future for any of the portfolios I run as I can’t really see that as being helpful to any readers.
I rather suspect, the most helpful way forward, apart from individual share returns within the Voyager RNS report, would be to simply indicate if my portfolio basket of shares is ahead of, matching or falling behind my rather challenging benchmarks. Personally, I feel that will serve what I am trying to achieve with my sharing of my ramblings about my investment thoughts far better than a “look at me” percentage performance. As I have said on a number of occasions, an average annual return of around 12%-16% sustainable over 10, 20 years or more makes in my book, for very valuable investment return. The wonderful returns we all enjoyed in 2017 where 30-40% returns were commonplace, is certainly not typical of the long haul and to my mind, can fool investors into thinking they are actually much smarter than they really are. For the sake of completeness and full disclosure, and aware that many investors measure their performance as YTD rather than the FY minimum that I use, I thought I should say that I am in the same boat as many investors since with the February 2018 correction. My portfolio is down in the order of 5% YTD which is in line with my benchmarks. In my view that’s the sort of thing that a switched on investor should really come to expect after that totally unsustainable run by the Dow Jones Industrial Average in the crazy three month period November 2017 to January 2018. As investors, we should not celebrate correction; albeit we may top up some bargains, but simply come to accept this is all part of the investment environment.
Finally, just to requote some words I included in the WC 04/02/2018 Voyager RNS:
Overconfidence can be a killer and I suspect after the sweet spot of 2017 that many PIs will feel they are very good investors. However, a strength for an investor is to remain very self-critical and examine the downside at least as much as you enthuse about the possible upside.
I hope you have followed my rambling reasoning covering benchmarking and investment returns as its taken at least a couple of decades to reach my held beliefs.
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.