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.