As the year comes to a close, it is time to reflect on the poor performance of my stock portfolio. But first, let me explain this is a relatively small portion of my financial assets. About 95% of my investments are in the 401k while I have the remaining assets in a Roth IRA. I use the Roth IRA as sort of an experimental account to try my hand at stock picking. It would seem my money could be better spent at a casino based on the past year.
This year, I finally decided to shop for a new online broker because ETRADE was charging $9.99 a trade. I was spending too much money on trading costs to make it worthwhile. I decided to switch to Interactive Brokers. I pay $1 per trade now or a minimum of $10 a month if I don’t make enough trades to add up to $10. This is much more efficient and it was a simple process to transfer my account holdings from ETRADE electronically to Interactive Brokers.
Back to my portfolio.
YTD Performance Since April
Since I transferred my portfolio in March, my Interactive Brokers reports only show data since April. The year started off pretty strong as I outperformed the S&P 500 Index (SPX), iShares MSCI EAFE Index (EFA), and the Vanguard Total World Stock ETF (VT) through the end of July. Then things quickly turned for the worse.
It looks like I will end up down about 5% in absolute return versus the S&P 500 which is up 11.44%. That’s over 16% less than if I had just bought the S&P 500 index. Active managers everywhere are being fired for less.
There are two main factors that drove my returns lower.
- I bought two call options without doing enough due diligence. One of them I profited on the other I lost it all as the option expired worthless. Lesson learned.
- I did not cut my position in RING, a gold miner ETF as gold started the trend lower around the middle of the year.
Portfolio Plan for 2017
Rather than spend too much time reviewing 2016, I am making a plan on how I will approach 2017.
Stocks are close to all time highs – why am I going to stay fully invested in stocks? Well, I don’t view now as a great entry point. I have reduced equity exposure in the 401k so I feel better about keeping the IRA fully invested.
I am going to move closer to the S&P 500 by matching sector exposure weights to my portfolio and selecting stocks within those sectors.
Current S&P 500 Sector Index Weights
|S&P 500 INFO TECH INDEX||20.84
|S&P 500 FINANCIALS INDEX||14.86
|S&P 500 HEALTH CARE IDX||13.60
|S&P 500 CONS DISCRET IDX||12.07
|S&P 500 INDUSTRIALS IDX||10.29
|S&P 500 CONS STAPLES IDX||9.33
|S&P 500 ENERGY INDEX||7.57
|S&P 500 UTILITIES INDEX||3.14
|S&P 500 MATERIALS INDEX||2.84
|S&P 500 Real Estate||2.82
|S&P 500 TELECOM SERV IDX||2.64
By matching the sector allocation, I should be able to track the performance of the S&P 500 better and lowering my risk of being 15% away from the benchmark. I will still be able to choose stocks within the sectors but the S&P will be my guide rather than just randomly picking and choosing stocks. I think this more disciplined approach will help me outperform going forward.
I will have to decide how often I will re-balance the portfolio to match the benchmark. I am thinking bi-monthly or quarterly to allow some flexibility so I am not constantly re-balancing. Even though the $1 commission at Interactive Brokers is low, I don’t want transaction costs to eat into my returns.
I expect the portfolio to be between 12-20 stocks. I have quite a bit of work to do before the end of the year. I will report back in January with my stock picks once I have my “Beta than the S&P 600” portfolio up and running.