My Annual Investment Portfolio Tune-up: Did I Beat the S&P 500 in 2007?

At the end of each year I calculate the performance of my investments and compare it to the S&P 500. Why? Curiosity more than anything. Some years I beat it, some years I don’t. Over the past five years, I’ve trounced the S&P 500. But I’ve been investing long enough to know that beating the S&P 500 is like hitting a 2-iron. It feels great when things go well, but disaster is always lurking around the corner. So how did I do in 2007?

Calculating the overall performance of a dozen mutual funds is not a simple task. I’ve added to several of the funds over the course of the year, and sold some shares of my Vanguard Emerging Market fund (VEIEX). Add in some other rebalancing during the year, and the calculation becomes even more tedious. Using some tools offered by Fidelity and Vanguard, however, I can come reasonably close to an overall performance number. To begin with, here is a table showing each of the mutual funds I own, followed by the percentage each represents in my portfolio, each fund’s 2007 performance as of December 27, 2007, and the weighted average return of my investments (note that I’ve excluded my cash holdings from this analysis):

This performance number comes reasonably close to my actual returns. My yearly contributions represent a small portion of my total investments and while I did rebalance some investments, these changes also represented a small percentage of my total portfolio. Using the performance metrics offered by Fidelity and Vanguard confirmed the accuracy of my weighted average returns. Note that the returns number includes reinvested dividends, as does the S&P 500 return number, which I obtained directly from Standard & Poor’s (see the return number in the “TR” row).

How to use returns data to make meaningful investing decisions

While I beat the S&P 500 in 2007 by 1.5%, the performance of individual funds is actually more meaningful to me. In evaluating a mutual fund, you have to look beyond just the performance numbers. For example, even though my Vanguard REIT Index fund performed the worst (-16.05%), I’m actually very happy with the fund. And I’m troubled by at least one fund that made money in 2007. Here’s why:

  • Vanguard REIT Index Fund (VGSIX): Even though it lost 16% this year, the problem wasn’t with the fund. The fact is real estate took a beating in 2007. Since 2000, however, VGSIX has enjoyed double digit gains each year but one (2002). So while the fund lost money this year, I have no plans to sell it. I also have no plans to sell FIREX (an international REIT fund), which lost 9% this year, and in fact, will be adding to the fund this year.
  • Bridgeway Ultra Small Company Market (BRSIX): This fund has trailed the S&P 500 and its benchmark for the past three years. My primary concern with this fund, however, is the number of stocks it owns. BRSIX is an actively managed fund with investments in about 500 companies. While it had an eye-popping return of 79% in 2003 and decent returns in 2004, it’s struggled the past three years. At this point, I don’t intend to sell this fund, but I will be watching it closely in 2008.
  • Dodge & Cox Stock fund (DODGX): This fund also concerns me. In 2007 it returned just 0.9%, 5% below the S&P 500. By itself, the performance number doesn’t concern me. Actively managed funds will often trail a benchmark. But what attracted me to DODGX several years ago was its focus on value investing. As assets in the fund have grown and its investments matured, however, it’s moved from a value fund to a blend fund. The fund’s track record is impressive, but I will be watching this fund closely in 2008.
  • Vanguard Emerging Markets (VEIEX): What could possibly be wrong here? The fund returned 39% this year and contributed substantially to the bottom line. Since 2003, the fund has been on fire. It represented about 10% of my portfolio when I bought it, and it still does even though I’ve sold shares to pay some debts and buy a car. But all good things must come to an end. Eventually emerging markets will deliver some gut-wrenching losses–they always do. But if it continues its current pace in 2008, I’ll be watching it to rebalance the fund back to 10%. I don’t follow hard and fast rebalancing rules, but I’d likely rebalance if the fund grew to 12 or 13% of my portfolio.

In the next article in this series, we’ll take a look at my asset location–that is, whether I have the right funds in my taxable accounts versus tax deferred accounts. And by the way, I have one fund in my taxable account that is a real problem, and can serve as a hard lesson for those just starting to invest beyond retirement accounts.

Published or Updated: March 23, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Dan says:

    Dough Roller:

    What motivated you to choose those funds? Why would you use Vanguard’s Emerging Markets fund over Fidelity’s? Fidelity Emerging Markets (3 year annualized: 41.74%) has trounced Vanguard’s (3 year annualized: 34.27%) over time. It has beat it again this year. I would have used (in fact I have used) a different mix of Fidelity and Vanguard funds. I do understand Brideway and Dodge and Cox as they have been very solid over the year.

    DC

    • DR says:

      DC, that’s a great question. I bought VEIEX at the end of 2002. I chose Vanguard mainly because I like the philosophy behind the company, although I own a number of fidelity funds. Over the past five years, VEIEX has returned 35.58% while Fidelity’s FEMKX (I assume this is the fund you’re referring to) has returned 37.35%. Of course, I had no way of know the performance ahead of time, and who knows what the next five years will hold. But I think either fund is a great choice if one is interested in emerging markets.

  2. Debbie M says:

    Make sure you compare each fund to the appropriate index. Although it’s interesting to compare your entire portfolio to the S&P 500, you should be comparing each individual fund to the appropriate index to see how well it fared against other stocks in the same category. As you said, REITs did terrible this year and emerging stocks did great. But how does your REIT investment compare to REITs in general, and how does your emerging stocks fund compare to other emerging stocks?

    • DR says:

      Debbie M, I couldn’t agree more that you should compare individual funds with their respective benchmarks. Comparing an emerging market fund to the S&P 500, for example, would be pointless. You can follow the links I have for each fund to the Morningstar Snapshot, and it will show you how each fund has done versus the S&P 500 and the fund’s category. In 2007, the Vanguard Emerging Mrkt fund beat its category and its benchmark, while the Vanguard REIT fund did not. As for the entire portfolio, the S&P 500 or some other “total market” benchmark is as good as any for a meaningful comparison.

  3. Martijn says:

    I have read this post and previous posts with interest, however I cannot escape the impression that if it hadn’t been for the single emerging market fund (VEIEX) @ 4.19 that the overall performance of the portfolio would have been only 3.3% or about 54% of the S&P index.

    That would make this more or less a close escape from the turmoil in the US markets. I suppose that is the purpose of a well balanced portfolio.

    Enjoy the holidays!

    • DR says:

      Martijn, that’s a very good observation. In fact, my international investments in general over the past several years have contributed a significant portion of my gains. The falling dollar has helped.

  4. mobajwa says:

    Just curious. do the return figures after factoring out the expense ratio’s of the funds ?

    • DR says:

      mobajwa, absolutely. All returns are net not only of the expense ratio, but also of all trading fees the funds charge investors, which aren’t included in the expense ratio.

  5. JJ says:

    The S&P 500 increased 3.81% over 2007.
    My combined Roth and IRA was up 30.31%.
    My wife’s, which I manage, were up 25.95%.

    The year before, our larger accounts were managed by a very big name, well known to anyone familiar with investing. While he beat the S&P which was up 13.62% for 2006, my wife’s accounts were up 25.75%.
    For 2005, the figures were similar. S&P 3.69%, my wife’s +14.01%

    After three years of kicking his butt, and other problems as well, I fired him and do it myself.

    I rode REITs, specifically FRESX, for five years, but when it got tired, I left for FIREX late in 2007, and then quickly sold FIREX for things like EWZ, OBCHX, and FXI.

    Portfolio diversification is terribly overrated. It ensures mediocrity.

    Nevertheless, all these previous successes did not avail me much during the past five months.

    • DR says:

      JJ, Interesting approach. But when it comes to investing, I strive for mediocrity. Striving for more usually results in a lot less. How have your investments performed over the past 15 to 20 years? Also, what were you invested in during 2007 that returned 30%?

  6. Just a more general question. Why do people compare their performance against the S&P500 specifically. Why not the Russell 3000 for example?

    • DR says:

      Sanjeev, that’s a great question. In my view, a fund should be compared against the index that most closely matches its asset class. For large U.S. companies, that’s typically the S&P 500. For mid-cap to small-cap companies, the Russell 3000 or Wilshire 5000 is the better comparison.

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