Measure Twice, Cut Once: Correcting A Year-To-Date Performance Error

by: Dividend Sleuth

Summary

In response to a good question from Jrookie, I'm publishing the ten year history of my retirement portfolio.

My dad always said to "measure twice, cut once".

I'm restating the previously posted portfolio gain percentages due to an error on my 12/31/2015 spreadsheet.

A question from Seeking Alpha participant Jrookie

I hope it is obvious by now that I take seriously the comments, questions and suggestions offered by SA participants. These conversations have made me a better investor and a better person.

The last time I updated my year-to-year progress was in mid-2013. I kept up with the monthly progress of the portfolio versus the S&P 500. In retrospect, monthly was too often. I fell behind with the bookkeeping and never caught up. However, my prior work, which included year-end brokerage reports, made it easy for me to retrieve the yearly data Jrookie requested.

I began 2016 with a commitment to be more transparent regarding trades made within my Retirement Portfolio. Today, I'm taking another step in this transparency process by posting the actual portfolio numbers as well as the percentages.

Measure Twice, Cut Once

My dad tried to teach me to "measure twice, cut once." I failed to double-check my year-end 2015 spreadsheet figures, so I based the 2016 portfolio year-to-date performance against the wrong number, thus overstating the portfolio's progress. I feel like the surveyor who made a series of errors by missing the appropriate starting point.

In 2015, I opened a taxable account, so for the first time the portfolio includes holdings in two accounts. I received regular disbursements from my IRA in 2011 through 2015. In late 2015 and in 2016, I put some "new money" to work in the taxable account. I didn't appropriate calculate these moving parts in late 2015 and early 2016.

I'm grateful to Jrookie for prompting this "audit" of the portfolio and I have submitted corrections for my seven most recent articles.

The Past Ten Years

Period Ending Value Contributions & Disbursements Adjusted Total % Gain or Loss S&P 500 % Gain or Loss
06/09/2016 357,100 3,300 Contribution 353,800 15.8% 2115.48 3.5%
12/31/2015 305,582 9,550 Net Contribution 296,032 -0.4% 2043.94 -0.7%
12/31/2014 297,335 9,000 Disbursement 306,335 10.3% 2058.90 11.4%
12/31/2013 277,838 9,875 Disbursement 287,713 15.6% 1848.36 29.6%
12/31/2012 248,851 22,489 Disbursement 271,340 13.8% 1426.19 13.4%
12/31/2011 238,347 11,710 Disbursement 250,057 15.6% 1257.60 0.0%
12/31/2010 216,238 123,832 Contribution 92,406 34.7% 1257.64 12.8%
12/31/2009 68,589 5,000 Contribution 63,589 17.8% 1115.10 23.5%
12/31/2008 53,987 9,250 Contribution 44,737 -23.4% 903.25 -38.5%
12/31/2007 58,384 1,750 Contribution 56,634 1.6% 1468.36 3.5%
12/31/2006 55,753 0 55,753 10.8% 1418.30 13.6%
12/31/2005 50,317
Click to enlarge

The 2010 contribution was a rollover from a pension account to an IRA.

The S&P 500 index does not include reinvested dividends, and I have never paid much attention to the portfolio's progress vis-a-vis this (or any) index. However, the S&P 500 index provides a reminder of the context in which investors operated each year, revealing the headwinds or tailwinds experienced by the broad market.

What have I learned?

I ask myself this question every day I am involved in the stock market. As I look back on the 10+ years reflected in this table, here are some of my takeaways:

  1. Measure twice, cut once. This one is pretty obvious, given the error that led to this article. But it's more than making sure the spreadsheet is accurate. It was only at the end of my study of HCP Inc that I realized S&P lowered their credit rating from BBB+ to BBB. The credit rating usually is the first thing I check on F.A.S.T. Graphs, but I was "out of sync" when I studied HCP. Years ago I remember buying shares of Flowers (NYSE:FLO) when I had failed to adjust my spreadsheet to reflect a stock split. I calculated the yield based on the pre-split dividend, which made the yield appear higher than it was.
  2. Stay focused. In the portfolio's early days I did not always stay true to a focus on dividend safety and growth. I look back at some of my purchases and ask, "Why did I buy that stock?" As I look at today's market, I remind myself daily not to be caught up in the recent rise of market prices, but to stay focused on safely growing the portfolio's dividend income over time.
  3. Stay in the market. At year-end 2008, I was 58 years old and my IRA lost almost 1/4 of its value. I never considered pulling out of the market because by this time I had over 25 years of market experience and I knew the market eventually would come back. Many less experienced investors pulled out of the market and missed the strong bull market that began in March, 2009.
  4. Four principles. My early market experiences came from participation in an investment club. In the early 1950s, the National Association of Investment Clubs (now BetterInvesting.com) developed four principles: (1) Invest regularly over your lifetime (don't time the market); (2) Invest in firms that are growing faster than the economy; (3) Diversify both by industry sectors and by company size; and (4) Reinvest dividends and gains for the power of compounding. The power of compounding is revealed in this table.
  5. Continue to learn. The portfolio has improved because I have continued to grow in my appreciation for the market and what it has to teach us. I've learned that quality is very important. I spent most of 2015 and early 2016 establishing positions in companies that have high S&P credit ratings, watching for opportunities, such as Cisco (NASDAQ:CSCO), Pfizer (NYSE:PFE), Qualcomm (NASDAQ:QCOM), Archer Daniels Midland (NYSE:ADM) and Cummins (NYSE:CMI) in recent months. I've learned to populate the portfolio with companies that have shown steady dividend growth over time, as reflected in David Fish's list of Dividend Champions, Contenders and Challengers. I try to learn from my mistakes. I've come to see every mistake as an opportunity to learn more about the market and (more importantly) about myself. This Thomas Merton quote helps me: "Every moment and every event of every(one's) life on earth plants something in his (or her) soul. For just as the wind carries thousands of winged seeds so each moment brings with it germs of spiritual vitality .... Most of these unnumbered seeds perish and are lost, because (we) are not prepared to receive them."

Dividend Growth

During the past decade, with the help of many Seeking Alpha contributors and readers, dividends increasingly have become the focus of my investment strategy and portfolio design. This is revealed by the amount of income generated by the portfolio.

Year Income Yield
2016 (projected) 14,496 4.10%
2015 13,053 4.41%
2014 14,325 4.68%
2013 14,288 4.97%
2012 13,791 5.08%
2011 9,576 3.83%
2010 5,620 6.08%
2009 2,830 4.45%
2008 3,031 6.78%
2007 1,089 1.92%
2006 637 1.14%
Click to enlarge

I used the "Adjusted Total" column in the first table to compute the yield for each year. Obviously, the yield fluctuates during each year, but this gives you a sense of the general direction. Dividends were not at the forefront of my consciousness in 2006-07. The Great Recession helped me understand the importance of dividends and the high yield in 2008 indicates that I had moved increasingly toward a dividend-focused portfolio. The yields were expanded as market prices contracted in 2008.

Summary of corrections that have been submitted:

Article Date Article Title Original YTD Gain Indicated Restated YTD Gain
June 9, 2016 HCP, Fibonacci and the Gas Station 18.8% 15.8%
May 22, 2016 4 Sector Closed End Funds Added 13.5% 11.2%
May 8, 2016 Canadian Imperial Bank of Commerce Added 13.6% 10.8%
May 1, 2016 Added Duke, Vanguard EM ETF and Farmer Mac 13.7% 10.9%
April 18, 2016 First ETF purchase Vanguard REIT 14.3% 11.5%
March 30, 2016 Time to add ETFs? 13.4% 10.6%
February 23, 2016 Looking for One Utility and One REIT 6.18% 3.3%
Click to enlarge

I apologize for the error that prompted this article. Jrookie's question led to a healthy review that was long overdue. The resulting "audit" caused me to pick up some analytical work that I had dropped in 2013. I hope that these reflections about the past decade will encourage those who are in the early stages of portfolio building.

Your comments, questions and suggestions are welcomed. I'm not advocating the purchase or sale of any security. I offer this update as the journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long JNJ, CSCO, GE, MRK, CMI, MSFT, PFE, QCOM, PEP, SO, MMM, PG, GPC, UNP, DUK, CNP, CM, IBM, WMT, DOV, WPC, WEC, TXN, EPD, EMR, ADM, T, HCP, HASI, PEGI, EVA, VWO, DEM, BGY, RFI, THW, BUI, VCLT, SCHW.D, CHSCM, ENO, AGM.C, KKR.A, PSA.B, STT.G, WFC.Q.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.