Yesterday, April 18, we celebrated Patriots Day, commemorating the battles of Lexington and Concord on April 19, 1775. What I enjoy about Patriot's Day, beyond its historical significance or the running of the Boston Marathon, is as a harbinger of spring and the glorious days of summer that follow.
Chart Attack!
As you might remember, I have recently reduced the publication frequency for the Under A Buttonwood Tree newsletter. However, about three months ago I began to publish Chart Attack! on a weekly basis as a supplement the newsletter. Chart Attack! is filled with charts, graphs, tables, and more. I have begun to annotate them to give each item some context.
There a several interesting charts in the latest Chart Attack!. You can find it on the home page or by using this link. You need to be a subscriber (see below) to this newsletter to view Chart Attack! Also, if you wish to receive Chart Attack! via email rather than going to the website, let me know by clicking the button to send me a note.
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Earnings Season Is Upon Us
Companies will begin reporting earnings in earnest this week. The early reports have been ok - no major surprises yet.
On Benchmarking
For some time, I've been wanting to write a note about benchmarks. Benchmarks are a useful tool to gain an understanding how a portfolio is performing. Are objectives being met? Is it keeping up with inflation and the capital markets? Are we taking on too much (or too little) risk? Finally, what actions might we take (if any) to improve upon our existing portfolio?
In my view, benchmarks come in two basic versions: absolute (what was my portfolio's return last year) and relative (how did my portfolio compare to the market or other money managers).
When you do your benchmarking, it's important to use reasonable time horizons - at least one year but also three, five, and even ten years. Shorter time horizons will generate a lot of noise given the volatility of markets and may lead to bad decisions about how to manage your portfolio. And for most individuals, unless you have a complex portfolio or you are an active trader, evaluating your portfolio versus benchmarks need only be done once a year or at most, once a quarter.
How do you get your portfolio's return? Most brokerage firms including Fidelity and Charles Schwab provide periodic returns, adjusted for any deposits or withdrawals. If you use a professional money manager, they will provide you with the information you require. (If they don't do so on a regular, timely basis, you may need a new money manager!)
You can also calculate returns on your own. It can get complicated if you have flows into or out of your account. If not, the calculation is simple:
(Ending Value - Beginning Value)/Beginning Value = Total Return
Here's one formula for determining the yield of your portfolio:
Portfolio Income (dividends and interest)/Average of Beginning and Ending Portfolio Values less Income = Yield
Note that this yield calculation is backward looking. Looking forward, the yield on your portfolio is the expected income from stocks and bonds divided by the current value of the portfolio.
With all that, here's a rundown of some of the absolute benchmarks you can use to evaluate your portfolio's results.
- Someone (Warren Buffett?) once said there were only two rules required for successful investing: first, don't lose money, and second, don't forget the first rule. That's not a bad advice, so let's set our first benchmark as a zero (or higher!) return. Simply put, is the value of your portfolio, adjusting for deposits and withdrawals at the end of the measurement period equal to or greater than the beginning value? If so, you are off to a good start!
- A second benchmark might be your withdrawal rate (if you are using the portfolio to support you in retirement, for example). Say you take 4% of the value of your portfolio every year to fund retirement spending. A return equal to or greater than 4% means your portfolio and the amount you can withdraw each year will continue to grow. (And your heirs will be pleased as well...)
- Let's suppose your portfolio had a return of 5% over the past 12 months but inflation over the same period was 7%. Now that positive return doesn't look so positive. In fact, your portfolio has actually lost 2% of its purchasing power. So our third benchmark is inflation. Beating inflation is an important goal for those of us who rely upon our portfolios to sustain us in retirement. Falling behind inflation means reduced purchasing power and potentially, a faster drawdown of your retirement assets.
- Fourth, I suggest you consider your portfolio's yield. While recognizing that your focus should generally be on the total return (income plus capital gains), if you rely upon your portfolio for income you will need to measure yield and income growth. Did the amount of income generated by the portfolio meet the expectations you had at the start of the period (for example, a 3% annual yield)? Is your income from the portfolio growing in line or faster than inflation? If not, once again, you are losing the purchasing power of that income which may result in increased withdrawals further eroding the value of your portfolio over time.
These four simple benchmarks, return, withdrawal rate, inflation-adjusted return, and income (or yield) are a good starting point for evaluating your results or those of your money manager.
Next time, I will discuss relative benchmarks, how to choose them, how to use them to evaluate performance, and, perhaps, what steps you might take to improve your results going forward.
From The Garden
Less than four weeks ago, our yard looked like this:
Now we have in daffodils and magnolias bloom:
Yeah!
And Finally,
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