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Market Strategies - Benchmarks 48 comments
A young portfolio manager asked an Eighty-year old advisor for his secret to successful investing.
Old advisor: "Good judgment."
Rookie: "How do you get good judgment?"
Old advisor: "Experience."
Rookie: "How do you gain experience?"
Old advisor: "Bad judgment."
One of the first things most investors are "conditioned" to focus on when they start investing, is to compare your results against an Index or some sort of benchmark. It is ingrained into our thought process so much that it almost becomes second nature. It's almost as automatic as breathing.
Wall Street has conditioned our thinking into this little box that says if you can't beat the Index, you might as well own it.
I believe that comparing your results to a benchmark is not only defeating, I think it qualifies under the bad judgment response by the Old advisor above.
The purpose of this instablog is to deliver the message that if you make the decision to take control of your investments, and you are wanting to compare your results against an Index, that it is "Crazy Thinking!"
Wall Street loves the concept of us using a benchmark because they know we won't beat it every year. People who manage money for a living can't beat the market every year, so they know we can't either. Money managers want us to doubt ourselves and our abilities. They want us to change our strategy and buy the Index. They need us to doubt ourselves and buy the Index. That's how they earn their fees. They want us to let them manage our money so they can't outperform the Index every year either, but at least get paid for that underperformance.
This instablog is not about owning or not owning an Index if that's your choice. It's about not comparing your results from other investments to it.
I thought most people become self directed investors because they were dissatisfied with the performance of an Index and wanted to better themselves. If that's the case, then why compare your results to something you don't want?
I know some of you will continue the exercise. Some of it is insecurity. Some of it is reassurance. Some of it is ego gratification. Regardless of the reasons, I think it is "Crazy Thinking."
Let's start with this. Do you know what the S&P 500 value is going to be at the end 2013? Do you know whether it will finish up or down? Do you know what the percentage of increase or decrease it will be? Then if you don't know the answer, how can you beat something you have no idea of what the result is going to be? How do you plan for it? How do you execute?
One of the most important aspects of succeeding in anything we do in life is to have specific, meaningful goals. We need a target to shoot for. How do you hit a target you can't see? How do hit a target that you don't even know is the target? You don't know what the Index target is. I'm starting to think that those who chase the Index are like the blind leading the blind. Nobody knows where they are going until they get there, but they don't know where there is. ... Ha!
One of the portfolio's I manage is called Project $3 Million. The portfolio is posted online for others to follow. It's a real portfolio, using real money, and it's updated in real time.
Here's the link: ... project3million.blogspot.com/
This portfolio's goals were established at the end of 2008. The pre-determined goal for the portfolio value at the end of year 2012 was $74,355.49. That is where the portfolio needed to be to stay on schedule for the $3 Million at age 65. The 2012 year end result was $84,710.60. The portfolio is ahead of schedule.
Those goals are specific! We know exactly what the target is. The target for year end 2013 is $86,959.44 (already achieved). The target for year end 2014 is $100,643.33 (now an accelerated target since 2013 is already acquired). We know the target for every year over the next 40 years and we know this now. Since we know the target for every year going forward, we know how to plan for it, we know how to adjust as we go, we know how to accelerate as we go.
Anyone want to take a shot at telling me how to plan like this using an Index? ... Anyone? ... Anyone? ... If not, why should I even care what the Index is doing?
Comparing your results to an Index, 12 months after the fact, since you couldn't plan ahead because you didn't know what the end result was going to be, is akin to throwing stuff up against the wall and hoping most of it sticks.
Some of you will still insist on making the comparisons though. So my question is this. If you don't beat the Index, what are you going to do? ... Nothing? Then what's the point? ... Are you going to switch strategies? If so, are you going to invest all of your money into the Index? ... If not, what's the point?
As stated above, I think it comes down to insecurity, or reassurance, or ego gratification. Otherwise, I don't get the point.
The danger of making comparisons!
In a recent article written by Bob Wells, someone commented on my strategy vs the S&P 500 Index. That person looked at Project $3 Million and determined that it only produced a 7% return in 2012. I don't know what the S&P did in 2012. I think it was around 12%, maybe more, I don't keep up with it. I know the portfolio was up 20.6% year over year, but some of that was helped by cash contributions. That person told me I would have been better off in SPY.
Well, garbage analysis in, garbage analysis out!
The person discounted the objectives of the portfolio. Didn't know how or when the cash distributions were made, and didn't understand that we were averaging up our positions in a strong market environment.
He came to an erroneous conclusion, one that would have had him, and me, if I listened to him, switching strategies, a strategy that is so successful, it's exceeding the pre-determined goals.
When you look at the performance of the Index at year end, it's very simple, it ended last year at one point, it ended the next year at another point.
My portfolio doesn't work that way, yours probably doesn't either. Cash is coming in or going out, changes are being made, most people don't know how, or wish to make the effort, to determine an accurate comparison between an active account vs a passive account.
Project $3 Million has cash deposited in the account twice a month. Most of those funds don't have an entire year to perform as the Index does. Am I supposed to think the funds being deposited later in the year are going to keep up with the market in a year where the market is doing well and had all year to perform? ... "Crazy Thinking!"
The cash being deposited is being added to existing positions. We are averaging up. All dividends are reinvested. Most dividends don't have all year to perform and those dividends are also helping the existing positions to average up in price. When you average up, your profit percentage comes down. And I'm supposed to think that's an apples-to-apples comparison to the Index?
How am I supposed to outperform the market "every" year when I'm averaging up? The goal isn't to beat the market every year. The goal is to focus on the objectives we have established and the strategies to carry it out. In the long run, the market won't keep up with us.
The person who told me I would have been better off in SPY didn't understand another concept. Suppose I did have 100% of the portfolio in SPY on January 1. Cash was being deposited into the account twice per month, every month, and that cash was put to work by building positions. We would have been building SPY. We would have been averaging up! Since we were adding cash, and averaging up, we wouldn't have matched the market even though we were the market. Think about it! ... Yet people will still want to make those comparisons. ... "Crazy Thinking!"
What about re-balancing? Re-balancing overweight positions is thought to be a prudent portfolio management tactic. If you choose your selections carefully and they enjoyed the success you envisioned, you may have to sell part of that successful position as a risk management technique. Where does the cash from the sale go? The cash from an overvalued position usually goes into an undervalued position. Outperformance to underperformance with the hope that the company is temporarily underperforming and the market will eventually realize the true value and make that position successful. It just takes time.
Well, if we are selling something that is outperforming the market, and buying something that is temporarily underperforming the market, how do I outperform the market every year? ... Then what's the point of comparing your results to the market?
Do we really expect we are going to buy companies with a temporary beaten down share price and the market is going to immediately reverse course on the day we buy and head higher? It takes time. How can we expect to beat the market every year when we are buying underperformance?
The person telling me I would have been better off owning SPY didn't take the portfolio objectives and Mission Statement into account.
Primary Objective:
Income replacement! ... The objective is to start earning an income stream now to replace the income that will be earned throughout the working years. The goal is to achieve $10,000 per month income in retirement. The income stream will need to continue to grow to stay ahead of inflation. A portfolio of $3 Million with a yield of 4% will accomplish that objective. Hence the title of this portfolio ... Project $3 Million.
Mission Statement:
To earn an income stream that is reliable, predictable and increasing.
The Portfolio Value Goals vs Results:
2010 - $52,053.79 ... $54,949.47 ... up 23.2%
2011 - $62,746.55 ... $70.221.20 ... up 27.8%
2012 - $74,355.59 ... $84,710.50 ... up 20.6%
The portfolio is ahead of schedule. Why would I worry about what the market is doing? Shouldn't I be focused on my goals? The strategy is working.
In my opinion, by comparing your results to the market or an Index undermines what it is you are trying to do. Why would you want to undermine something that is more successful than you planned for?
This series of instablogs on Market Strategies has been about trying to get people to understand that stock selection performance should not be the focus, your strategy should be. Then you own the stocks that support your strategy. If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!
The Mission Statement talked about a reliable, predictable and increasing income. Here are the total dividend results:
2009 - $684.38
2010 - $1,693.33
2011 - $2,404.02
2012 - $2,808.46
That too is working!
The end objective for Project $3 Million is to have $3 Million yielding 4% which should generate $10,000 per month in income. It's that monthly income that is the objective.
Project $3 Million has a current yield of 4.0%. If I switched to SPY as was suggested, SPY only yields 2.07%. Project $3 Million would have to become Project $6 Million to generate the same income. ... Now tell me why is an Index a better option?
I'm beginning to think "Crazy Thinking" is turning into "Insane Thinking."
Again, this instablog isn't against "owning" an Index. Some people have no choice, others choose to. I have no problem with that. Project $3 Million has a small part of the portfolio in Index Funds.
This instablog is about not "comparing" your results to an Index once you commit to owning individual companies. Once you make the commitment, I think you should burn that bridge and make what you are trying to accomplish, work.
I think it is more beneficial to establish meaningful goals and focus on achieving them. I think one should find a way to compete and compare against themselves, always trying to improve, without something undermining what it is we're trying to accomplish.
We strive to set new monthly and weekly income goals. We keep track of our dividend records. That's a lot of fun!
Learn to compete against yourself.
Benchmarking is the essence of getting you to undermine your confidence and abilities. It attacks your sub conscious creating doubt when you don't beat the benchmark, and creating false motivation when you do. The benchmark will take body shots at you, trying to wear you down. The Market wants those fees. They need you to lose faith in your strategy and let them handle your business. Stop making those bad judgment calls and stop benchmarking.
When we stop worrying or caring what the market or others are doing, what I refer to as a bad judgment call, and we start focusing on our goals, we'll graduate from the rookie portfolio manager at the top of this blog and become that successful portfolio manager. It's all up to you.
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This post has 48 comments:
Wwwau! so good post written in 1 day after excellent previous one - are you journalist?
I agree with main idea "This instablog is not about owning or not owning an Index if that's your choice. It's about not comparing your results from other investments to it."
Nevertheless I would like to add the following points:
1) If you think that you can beat the Index - compare your resources with Wall Street computer and intellectual power presented in excellent book "Quantitative Equity Investing: Techniques and Strategies" by Frank J. Fabozzi, Sergio M. Focardi, Petter N. Kolm (it is not an easy reading but at least must give you the right impression of your competitor with whom you deal in ~ 80% cases for big caps).
2) Remember Wall Street still has profit if you own index although it is not as big as usually - see http://bit.ly/ZABWCl.
In some cases (small portfolio <30K$ and short time horizon - see http://bit.ly/XNfrZV) it makes sense IMO to invest in index because your expenses in this case are smaller than brokerage fees for reasonable diversification.
3) "This portfolio's goals were established at the end of 2008. The pre-determined goal for the portfolio value at the end of year 2012" You should have investment goal but 4 years are too short IMO to define that you are on track with DGI. I think at least 7 years is needed to avoid fluctuations in performance (well.... 2008-2012 were hopefully special i.e. bad for DGI so such half-of-period might be OK). BTW many SA contributors reports their portfolio performances on annual and even monthly basis - I LOL from their short vision....
"We know the target for every year over the next 40 years and we know this now."
Again IMO annual target isn't important. I hope you not cancel the project if market & dividends drop down in 20XX and you will miss your annual target.
To be continued.....
SDS
Not always. To rephrase "Common sense does not make science" I can say "Sound strategy does not make profit" until it is statistically (unfortunately, the only way with stocks) proof - it was point of my comments to your previous blogpost and main reason of the "Dividends Heritage Project" (http://seekingalpha.co... and
http://seekingalpha.co...).
Anyway, I agree with main idea of this blogpost.
SDS
As you said, "I thought most people become self directed investors because they were dissatisfied with the performance of an Index and wanted to better themselves." This is exactly why we have moved away from index investing... but the norm is so firmly entrenched in index investing, to go against that tide seems virtually heretical. Insecurity, as you point out. What if our investing judgment isn't sound enough to deliver the goal we're aiming for? What if I'm exiting index investing at precisely the time when it would have been the smarter move to stay? I'm always striving to improve and yet also wary of my personal "unknown unknowns" of investing.
First of all, make sure that what you are aiming for is believable and achievable. The next step is to read, read and read some more. Then you have the SA community to count on.
>>> What if I'm exiting index investing at precisely the time when it would have been the smarter move to stay? <<<
You handle this the same way you eat an elephant, one bite at a time. Each year move 20% or some other number you are comfortable with out of Index Funds and into high quality companies.
As you gain knowledge, you will experience, and then you'll gain confidence.
Chowder, I'm definitely stealing that line from you! :-)
It's been interesting to see how each stock you pay attention to has something to teach you.
Chump
The Tank said it. I'll remember that. ... Ha!
"If you don't beat the Index, what are you going to do? ... Nothing? Then what's the point? ... Are you going to switch strategies? If so, are you going to invest all of your money into the Index? ... If not, what's the point?"
If I build my personally selected portfolio, and compare it to the index and discover that over the past 5 or 10 years that I have failed to match even the index, then yes, I would take a hard look at my "strategy" and either make adjustments or throw in the towel and switch to index funds.
Why is this unreasonable? You seem to be suggesting that it is better to put blinders on and pursue your strategy regardless of whether it performs better or worse than any other. (And indexing is simply that -- another possible strategy.)
Comparing one's strategy to other strategies is the only way to know if we're doing as well as we could be. If my "strategy" is to put all my retirement savings in a garbage bag in the basement, don't you think it would behoove me to compare that to keeping the money in CDs? And if all of my money was in a money market account earning a tenth of one percent, should I be content that I am making money each month?
It is great that Project $3 Million is making money and is exceeding your targets, but unless you compare it to other things you might do with the money, you have no idea if you might do even better with another (simpler?) strategy. If you don't care to reach your goals faster, simpler, cheaper, or with less risk or volatility, then of course you needn't compare your strategy to any other -- so long as it is on target (which you seem to be). But that fact in no way invalidates the incredibly natural and valuable process of comparing your strategy to the others out there.
If I am one of 20 people doing the exact same easy and fun data entry work at a company, I should be content to make $100,000 per year with great benefits, right? But what if I found out that most of the other 19 people were making $150,000 per year with the same benefits? That 100,000 is great, and it will get me comfortably to retirement. But the comparison to my co-workers suggests that, maybe, I am leaving something on the table that I might want to look in to. I don't see the harm in that.
It's not unreasonable to compare one strategy to other strategies, if they all have the same goal.
It is unreasonable to compare a strategy to something (like an index fund) that has a completely different goal.
The goal of an index fund is to achieve the market return. If you have a different goal, then it doesn't make sense to compare your strategy with an index fund.
So, if my goal is to maximize my wealth, and if my portfolio of individual stocks is under-performing the indexes over a long period of time, I would be wise to consider switching. Looking at the index to measure my performance is not a weakness or a distraction, it seems to me the very height of common sense.
(I want to be absolutely clear -- I have a DG portfolio in which I pick my own stocks. I love the strategy and I believe that I will do better than the S&P 500 over time with those stocks. My only beef is with the notion that it is a bad idea to compare your DG results to the index.)
EDIT: Moreover, anyone sophisticated enough to confidently build their own portfolio of stocks ought to be able to understand the ways in which an index differs and the strengths and weaknesses of comparing their returns to the index. If a person can't factor these things in, they probably have little business being in stocks in the first place.
Comparing an apple to an orange is not a useful comparison.
All I want is enough wealth to live on comfortably for the rest of my life and with luck leave a nice chunk to the kids. I think that may be true for most. But I really don't care if that wealth comes as a growing stream of dividends from a portfolio of DG stocks lovingly collected over the decades or if it comes from a pile of stocks that pay no dividends at all but have appreciated in value a lot or if it comes from a lottery ticket, or if it comes from a mix of all three.
I happen to believe that my best shot at the kind of wealth / lifestyle I want comes from the DG portfolio, growing stream of income approach. And so that is what I am doing. Like chowder's Project $3 Million, my DG portfolio seems to be working out pretty well so far. Like him, I've got clear goals that I have set myself and, thankfully, the portfolio is meeting those goals so far.
But the DG portfolio, and its increasing stream of income are not my *goals.* They are only a means to meeting my real goal -- financial security. I am not emotionally attached to the approach. I just happen to believe that it is the best alternative before me right now. And I will stick with it as long as I believe that to be the case. Maybe that takes me happily right through retirement. Maybe not.
So sure, you can call indexing and DG "apples and oranges." I get that they are not the same thing; I understand the differences. But they are two of many possible paths to try and achieve the wealth (financial security) I want. And it is worthwhile, I believe, to keep an eye on those various paths to security. It makes no sense to me to say that "DG investing" is my *goal* and to hence conclude that it is a bad idea to compare DG investing to other approaches.
While it is important to know that you are comparing an apple to an orange, it does not make the comparison meaningless. Sometimes you need to decide whether you want an apple or an orange. I think my DG apple is the greatest, and I am sticking with it. But that does not mean I shouldn't keep my eyes out for a juicy orange!
I personally don't consider wealth and financial security as exactly the same.
Wealth may be "3 million".
Financial security is $10k per month that also increases at least of the rate of inflation.
These are NOT the same (hence apples and oranges).
Ok, I can get with that. But is your one and only goal to the exclusion and disregard of all others "$10k per month that also increases at least at the rate of inflation"? Or would you also consider having the flat $3 million? I am not saying that they are the same thing -- I understand that they are different. But if you would also consider having the flat $3 million, then you are already comparing apples and oranges.
Using your definitions, financial security could be achieved through the income stream OR the pile of money. I'll happily take either, if offered. So while growing my DG apple, I will not willfully put on blinders about the possibilities other strategies might have to offer. That is all I'm saying.
I believe the point of the article is that with "project $3m" the goal is the "$10k per month that also increases at least at the rate of inflation".
IMO, the project is mis-titled since the $3m indicates a wealth goal where the actual goal has little to do with the "wealth" number.
Here's a "for example":
A person in 08/08 has a $3m wealth, that generates $9k/month.
The wealth goal is met, but the income goal isn't.
By 03/09, they have $1.8m of wealth, but (due to dividend increases) now generates $10k/month.
I'm personally not retired yet, but I don't have a "number" goal, I have an "income + raises" goal.
Yes, but then it's what "strategy" you will employ to meet the financial security goal. It could be "rental property", or "4% withdrawal", or "DGI", or ...
I think the point of the article is that *your* strategy might *require* certain aspects (e.g. rental rates mirror inflation, or ~4% + inflation annualized returns, or ...). So, why compare to an index?
I used to think the same thing, so I understand where you are coming from. Here's what I learned.
Strategies are no different than selecting stocks. You need to do you due diligence ahead of time and find out what strategies have worked best over a long period of time.
The last thing you need to find out is that you selected the wrong strategy 10 years down the road.
I'm a hard head! I have to screw up before I get it right. Years ago, I read a book about the most successful fund managers and I studied their various strategies. My mind wasn't right when it came to absorbing those strategies. I started off right but then the tech boom came and I switched strategies to chase tech and telecom start ups. Tech, and the Index, was crushing my dividend portfolio. Whew! Comparing my portfolio to the market caused me to switch and the switch nearly killed me when the market crash came along.
Yes, I owned the Index at the time too. It also crashed and of course, I panicked. Meanwhile, back at the ranch, the companies I had set up with DRIP's, although seeing share price drop, they just kept plugging along.
SDS continues to remind us that 10 years isn't enough time to measure strategies. You don't have enough various market conditions to get a true picture. So, you look at what has worked over a long period of time and then you commit to it. When you commit to something, a funny thing happens. Your mind opens up and you find ways to make it successful. If you keep looking over your shoulder, you're going to compound your doubt. Doubt clouds judgment.
I hate the word maximize. ... Ha! Ha!
You can't define it. You can't measure it. How do you achieve something you can't define or measure?
What's the target? How do you hit it? How do you even know you achieved it? No matter what your number is, how do you know you maximized it?
There is always ... ALWAYS ... going to be something that outperformed you. I don't see how looking in the rear view mirror can help me obtain success. But then you have to define success. Success to me is the achievement of predetermined, specific goals, which Project $3 Million has defined.
Achieving maximum results is not a goal, it's a dream or a wish.
When you put a football team together, you have a strategy in mind, they call their strategies schemes. You define the schemes you wish to deploy and then you select the players (companies) that work best for those schemes (strategy).
When the game starts and you find yourself losing to the opposing team (Index), you don't change your strategy, you make adjustments.
You may lose this week, as will will lose in some years to the Index, but if you've selected the right schemes (strategy), and picked the right players (companies) for that strategy, you'll make the playoffs every year. You may not win the Super Bowl every year, but you will enjoy success as a team.
You are correct of course, but it was a motivational technique.
At the time, I was establishing the portfolio for a 23 year old person. I needed something to grab his attention, and something that hopefully would keep him motivated.
At age 23, I didn't think calling it the $10,000 per month retirement fund would work. I thought the $3 Million would capture his imagination. It did! He's committed now.
Capture the imagination, the heart will follow. ... Ha!
This is correct for some indexes ONLY. Now there are plenty indexes and ETFs with different goals (unfortunately DGI is not at the list as far as I know).
Thanks for the very important reminder about the dangers of comparing results to an index.
I think it is even more dangerous for self directed investors when first starting out because the new funds coming into investment accounts represent a larger percentage of the total portfolio.
These new funds will skew a portfolio's average towards 0% (which can be useful if the portfolio is showing a loss for the year ;)
For many years, my friends at work have an annual competition to see who's portfolio performs the best during the year, and I soon came to the realization that if I have a good year, I can lose simply by investing new funds in the later part of the year, as it drags my portfolio performance average down.
It didn't take long to decide that I would not let that friendly competition alter my retirement plans.
"If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!"
I always prefer a DIY spirit, whether it's home repair, changing your car oil yourself, installing a new dishwasher... the satisfaction gained from accomplishing the goal is worth it. My adivce?: cancel cable, the amount of free time is amazing and the $1,200 a year savings is almost a "free" DG position (at least for me)...
(Now let me fall prey to it as well: They charge 1% (1.5%?)... that gives me an extra 1% to under-perform them and break even in comparision to them!!! lol)
I can see why you think that. I wasn't clear enough in my statement.
I said, "If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!"
I added that for those who are concerned about beating the market.
As for losing cable? Blasphemy! I don't watch network TV. If someone put a gun to my head and told me to name one primetime show on network TV or lose my life, I'd have to start praying. I haven't got a clue. I do watch my sports though.
That little avitar next to my name represents the Arsenal Gunners in Premier League Football, soccer to you sports heathens. ... Ha!
I watch my European sports every week and I can't do that without cable. I pay $15 per month extra for just one channel, but that's the channel I watch most.
If we are purchasing "high quality" dividend growth stocks, most of those candidates are going to be listed in the S&P 500. If you are buying "high quality" they are going to be the most financially sound companies in the S&P 500.
If you are buying the best of the S&P Index, doesn't it make sense you will outperform the Index over time? After all, if you are managing your positions properly, you may hold a company whose share price is broken down, but the company isn't. When the company starts to break down, you are out of that position before the S&P 500 discards it.
It's those large well established companies that have carried the Index all these years. Best in breed is what they are called.
And that's another reason why comparing to the Index is a waste of time. You are already the best of that Index. You just need to know how to add and subtract your positions and we'll be showing some examples of that going forward.
Should we create (and more important maintain) DGI index based on CCC list? It is possible to create few public portfolios based on CCC list with different rules (e.g. whole list or sub-portfolios for each "C") but somebody with good portfolio software (not me) should handle them. I think these DGI index and portfolios might be a good benchmark for DGis.
SDS
There could be several of them, in fact :), one for Champions, one for dividend growth juniors, etc, etc, etc.
a) demonstration of diversification importance for DGis /I fill than many DGis have too concentrated portfolios),
b) tool to compare DGI with other investment styles,
c) better understanding of DGI limits (not to have too high expectations).
SDS
From your post...
"People who manage money for a living can't beat the market every year, so they know we can't either. Money managers want us to doubt ourselves and our abilities. They want us to change our strategy and buy the Index. They need us to doubt ourselves and buy the Index. That's how they earn their fees. They want us to let them manage our money so they can't outperform the Index every year either, but at least get paid for that underperformance."
And back to Cranky...
Actually, one would pay active managers and advisors to BEAT the market. They can't (mostly), so investors pay more for less in returns. No logic (or retirement) in that process.
Portfolio and fund managers don't want you to buy the index. They don't make money off of that (unless you find a rare and sensible fee-only advisor). They want to put you into 'market beating' funds and active management.
The mutual fund industry is very clear about this they ask why you 'would only accept the market returns?'. Then most of them go out and underperform. And send you a very nice bill.
I refused to sell them. I was called into the office and I explained to them I felt guilty trying to sell these loaded funds to little old ladies trying to get by. I was fired. ... Ha! ... That wasn't the first time I was fired for being defiant, so it was no big deal to me. I still had a little bit of credibility left with my clients.
It feels real good to make them aware, and suggest they stop paying those fees. Fees are one thing they can control.
On your project 3 million blog you say your goal is 8.5% compounded annual return. Does this include the $500/month that you are contributing, or are you only factoring in dividends you collected and capital appreciation when you make the calculation. If the later, what formula do you use to calculate what your actual return was (not including new contributions)?
When the market is doing well, then the contributions, share price and dividends can help accelerate the results, as the portfolio is doing now. I have no objection to having the portfolio achieve the total result 10 years early.
Just win babee! I don't care how, as long as it's legal. ... Ha!
I don't factor actual return. It's irrelevant as far as I'm concerned. All that is important is hitting that $3 Million, regardless of where it comes from.
During the first few years I expect that the $500/month ($6000/yr) contribution you make will almost always but you over the 8.5% goal for the year. I'm guessing that is part of the reason your portfolio is a year ahead of schedule. But as your portfolio gets bigger that $6000/yr will become less important to your return. Do you plan on increasing your contributions over time? And if you find that your portfolio is falling behind on the 8.5% goal, what is your plan to address that?
Thanks!
I should have also mentioned that as time goes by, and the amount of dividends being created continues to grow, that those future dividends should more than make up for the monthly contributions.
One of the intermediate term goals is to get the monthly dividend total up to $500 per month to match the current monthly contributions. At that point, you have $500 per month in cash and $500 per month in dividends all being reinvested at the same time.
I think we'll start to see the early effects, at that time, of how compounding will take the portfolio forward.
I need a market correction! I'd love to see the market pull back 15 to 20 percent. The amount of cash and dividends being reinvested would help a great deal going forward because we'll be able to purchase more shares for the same amount of money. The more shares we can purchase, the more dividend income we can expect to receive because dividends are based on shares, not share price, as you know.
Bravo for a great blog article. I appreciate and admire your directness and willingness to challenge conventional wisdom. Very refreshing!
I was a manager for many years in a large tech company which used an annual "index" ratings process for employees, with forced distributions along a bell curve. It was the basis for promotions, bonuses (when they existed), raises, etc. Only marginally effective - literally marginal, as really only the top and bottom 10% could be considered even remotely reliable. Can you really distinguish performance as 69% vs. 71%? Ditto portfolio performance, IMHO. In the end, the only "index" that matters is performance vs. your own individual plan - which also underscores the importance of having a plan that reflects your own personal goals and assumptions. And then not deviating from it, as long as it continues to serve you. That's my new index.
These posts have been a real educational experience. They have been highly informative articles and the comments have been just as constructive. I look forward to learning more from future posts in order to complete our family's project that is similar to yours.
Thanks again, Josh
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