Beating the S&P 500, part 2
August 30, 2007 by Pinyo.
In “Beating the S&P 500, part 1,” I showed you my my investment performance that beaten the S&P 500. In this post, I will show you another way to look at these numbers and reveal how I managed the feat.
Here is a different look at the numbers
The following table shows how $10,000 invested in my 401k (column B), VFINX (column C), S&P 500 (column D), and IRA (column E) grew at different pace.
Chart updated October 1, 2007
Graphically,
How did I do it?
You might be disappointed to learn that I did not have any investment secret to share. The performance you see here was the result of sacrifice, patience, and discipline to stick to a plan.
Here are the factors I believe contributed to the superior performance:
- Regular Contributions — with 401k I invested more money every 2 weeks. This allowed me to buy more shares when the prices of the funds are low and less when the prices are high.
- Aggressive Asset Allocation — since I have over 30 years, I decided to be aggressive with my investment — e.g., take on more risk. My current allocation is 20% Large Cap, 20% Mid Cap, 20% Small Cap, 30% International, 5% Company Stocks, and 5% REIT.
- Regular Reallocation — I reallocated my funds (at no charge) when the asset allocation shifted by a few percentage points. This allowed me to shift money from good performing funds to buy more shares of poor performing funds. This basically helped me “buy low and sell high,” and at the same time reduced the downside risk.
- Automatic Reinvestments — as you can see from “Introduction to CAGR,” the difference between S&P 500 with Dividend Yield (green line) and without (blue line) was dramatic. My 401k plan automatically reinvested all fund distributions. This allowed the full power of compounded growth to work.
- Strong International Fund Performance — In the past few years, my international investment performed much better than my domestic investments. One of the reasons behind this may be the weakening U.S. currency. In any case, this gave me a nice boost.
Well, that is pretty much how I have been beating the S&P 500 in a nutshell. I am still working on refining my stock picking skill, which I have been getting mixed results. For example, I have picked winners like Staples (SPLS), but also got some losers like Flemings (FLMIQ) and eToys (ETYS).
I would like to hear your comment. Thank you.
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- Aug 30, 2007: Beating the S&P 500, part 1 | Moolanomy
- Sep 3, 2007: Does dollar cost averaging work? | Moolanomy
I’m a bit confused. Are you using your dollar-weighted return, or time-weighted return here?
Jonathan - welcome to Moolanomy. I actually didn’t know what dollar-weighted return and time-weighted return are and had to Google it.
I assume your question applies to how I measure my portfolio performance and not the S&P. If I read the definitions correctly, I used time-weighted return. Basically, I treat any net new money added for the entire year as if it’s been there for the whole year.
So, if I add the money every 2 weeks and it’s a trending up year most of my money did not have as much time to grow that year and will underperform.
Does this answer your question?
Did some more research. What I’ve used is actually Holding Period Return (HPR), not Time Weighted Return (TWR).