In writing the opening comments for the July AAII Dividend Investing monthly newsletter, I discussed how the market's performance this year has been better than most investors probably think. As of June 29, the S&P 500 index has a price gain of 8.31% and total return of 9.49% for the year-to-date.
If your portfolio's performance is not quite as good, don't feel bad. The volatility over the past six months has, at times, made it difficult to figure out which side is up. It's certainly made it more challenging to figure out what sector to rotate into and what sector to rotate out of.
Take the year's second- and third best-performing sectors, for instance. Financials and information technology have year-to-date gains of 12.63% and 12.71%, respectively, according to S&P. Yet, during the second quarter, financial stocks lost 7.27% and technology stocks lost 6.96%.
What about the year's best-performing sector? Well, to realize telecom services 13.34% year-to-date gain, you would have had to sit through a lackluster first quarter while Mr. Market was handing out party favors to investors in other sectors.
Seeing sector rotation is not unusual, but when it is combined with global uncertainty, the potential for making mistakes is heightened. This is particularly the case for those of you who were already frustrated with the market heading into 2012. When the returns of the major indexes are better than those of your portfolio, the temptation often is to change something.
If this describes you, don't be quick to assume that you need to change anything. Investing styles move in and out of favor over the short term. A strategy with a good long-term track record may underperform over a period of several months or longer, depending on market conditions. If it is based on sound characteristics (reasonable valuations, financial strength, growth in sales and earnings, etc.), it should go back to working well as long as you stay disciplined, conduct proper analysis and don't make investment decisions based on emotions.
If you follow a strategy that incorporates price momentum, realize that such strategies are inherently volatile. Thus, you need to understand what the sell rules are and stick to them. There is nothing wrong with using momentum, as long as you look past what is simply hot right now and focus more on the stocks with the fundamental characteristics to justify a higher price in the future.
Calculating Your Performance
At the most basic level, you can calculate your portfolio's return by comparing the change in value between the start and end of the time period you are reviewing. If you have added or withdrawn cash from your portfolio, however, the calculation becomes more complicated. How to Calculate Your Portfolio's Return on AAII walks you through the steps to determine what your return actually is.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.