Sunday, December 31, 2006

Trade Review: Year End Part 3

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.

6 comments:

NO DooDahs said...

You might want to compare to the dividend-adjusted return on SPY.

Anonymous said...

Steven,

You say I never comment. YOU ROCK!!!!!
Come up to the top of the mountain and see me sometime.

Steven said...

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.

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QUALITY STOCKS UNDER 5 DOLLARS said...

Nice review

QUALITY STOCKS BELOW 5 DOLLARS said...

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