Obviously in order for me to justify investing/trading I have to confirm that I add value. One way to determine that is measuring my results against a benchmark. Before I do that I must say that I am more inclined to be in the "absolute" return camp.
By measuring success to an arbitrary benchmark I may end up unknowingly limiting my chance for success by making decisions which look favorable as compared to the benchmark but reduce my chance for a larger return. Moreover, the idea that I did not do so bad in any given year as long as I beat selected benchmark seems a bit ridiculous. If my benchmark were the DJIA and that index was down 15% in a given year while my portfolio was only down 5% I would not feel inclined to celebrate that I "beat" the benchmark by 10%. I would be pretty pissed that I lost 5%. So I much rather just focus on maximizing my return without reference to any benchmark.
With that said, I do think that it is important to compare results to a benchmark as a way to determine whether I actually added value to my portfolio. In other words, should I stick with investing for my own account or should I admit that I would be better off seeking help from a professional or even using ETF's to index.
Taking a cue (as I often do) from Bill Rempel I went ahead and used the S&P 500 as a benchmark. In the archive of Bill's original Nodoodahs blog Bill explains why and how to measure returns using the SPY as a proxy for the S&P 500. So I just went ahead and did that as Bill described.
Using the various dates I deposited money into my account as hypothetical purchase dates and using the closing price on each date as my purchase price, I "bought" shares in the SPY. Following that strategy would have resulted in an annualized gain of 13.22%. Therefore, compared to my actual 19.62% return it would appear that I did add value.
There is another benchmark that I am using that is also important to me and a bit more personal. Much of investing is about opportunity cost, you have a limited supply of money to invest and have to decide where to invest it. Like many, my largest debt is my home mortgage and paying it off is a goal I have. Now obviously every dollar I pay down the mortgage is worth xx amount of percent saved, lets say 6%. So if I have $1,000 and send it towards principal, I will earn 6% guaranteed.
When I decided to start investing I told myself that I would do so only if I could at least match that 6% rate of return. If I could not then I saw no point of investing and figured I might as well just start paying down the mortgage. Well so far I did okay this year when compared to that benchmark and will have another go at it in 2007.
Obviously this is my last post of the year. I just wanted to say thank you to all those who have visited and to those who I have corresponded with. It has been a great year for me and all of you were a large part of my success. I just wanted to say thank you.
I look forward to the upcoming year and hope that it is a good year for all of us. To start the year off right, look for my first post of the New Year where I explain just how it was I successfully invest this past year.
See you next year...LOL.
By measuring success to an arbitrary benchmark I may end up unknowingly limiting my chance for success by making decisions which look favorable as compared to the benchmark but reduce my chance for a larger return. Moreover, the idea that I did not do so bad in any given year as long as I beat selected benchmark seems a bit ridiculous. If my benchmark were the DJIA and that index was down 15% in a given year while my portfolio was only down 5% I would not feel inclined to celebrate that I "beat" the benchmark by 10%. I would be pretty pissed that I lost 5%. So I much rather just focus on maximizing my return without reference to any benchmark.
With that said, I do think that it is important to compare results to a benchmark as a way to determine whether I actually added value to my portfolio. In other words, should I stick with investing for my own account or should I admit that I would be better off seeking help from a professional or even using ETF's to index.
Taking a cue (as I often do) from Bill Rempel I went ahead and used the S&P 500 as a benchmark. In the archive of Bill's original Nodoodahs blog Bill explains why and how to measure returns using the SPY as a proxy for the S&P 500. So I just went ahead and did that as Bill described.
Using the various dates I deposited money into my account as hypothetical purchase dates and using the closing price on each date as my purchase price, I "bought" shares in the SPY. Following that strategy would have resulted in an annualized gain of 13.22%. Therefore, compared to my actual 19.62% return it would appear that I did add value.
There is another benchmark that I am using that is also important to me and a bit more personal. Much of investing is about opportunity cost, you have a limited supply of money to invest and have to decide where to invest it. Like many, my largest debt is my home mortgage and paying it off is a goal I have. Now obviously every dollar I pay down the mortgage is worth xx amount of percent saved, lets say 6%. So if I have $1,000 and send it towards principal, I will earn 6% guaranteed.
When I decided to start investing I told myself that I would do so only if I could at least match that 6% rate of return. If I could not then I saw no point of investing and figured I might as well just start paying down the mortgage. Well so far I did okay this year when compared to that benchmark and will have another go at it in 2007.
Obviously this is my last post of the year. I just wanted to say thank you to all those who have visited and to those who I have corresponded with. It has been a great year for me and all of you were a large part of my success. I just wanted to say thank you.
I look forward to the upcoming year and hope that it is a good year for all of us. To start the year off right, look for my first post of the New Year where I explain just how it was I successfully invest this past year.
See you next year...LOL.
5 comments:
You might want to compare to the dividend-adjusted return on SPY.
Steven,
You say I never comment. YOU ROCK!!!!!
Come up to the top of the mountain and see me sometime.
Bill: So they way I look at it is the SPY close on 12/30/05 was 124.51 close one year later on 12/29/05 was 141.62 for a gain of 12.08%. If I add in the dividends paid of $1.65 the return comes out to 13.09%. So if I rough it and add in the full 1.01% I get 14.23% aginst my 19.62%.
Shane: Man I go to your website every day.
I have a web site where I give advise on penny stocks and stocks under five dollars. I have many many years of experience with these type of stocks. If their is anyone that is interested in these type of stocks you can check out my web site by just clicking penny stocks. I would like to take a moment to talk about low price stocks not classic penny stocks or stocks under one dollar the term most people most often think of when the word penny stock is used. Their are companies of really decent quality trading under five dollars’ but for every one company trading under five dollars that is of decent quality their are maybe ten of poor quality. So the really big difference between those investors that are tremendously successfull when it comes to investing in low price stocks and those investors that lose enormous amounts of money investing in stocks under five dollars’ is having a great deal of knowledge and experience when it comes to low price stocks’ or having a total lack of knowledge and experience when it comes to low price stocks. Finding quality stocks under five dollars requires a lot more research than finding a decent stock above ten dollars.
Nice review
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