With 2010 in the books, your inbox and mailbox has already been flooded with annual investment statements. For most of you, it was a positive year thanks to the strong fourth quarter. You would probably say last year went pretty well for your investments.
Certainly in absolute terms, this is true for most of us. The total return of the S&P 500, comprised of roughly the 500 largest U.S. public companies, was 15.1 percent last year. When you consider this in the context of almost non-existent inflation, this year was certainly above average.
Those investing in smaller companies did even better for 2010. The S&P 400 MidCap Index, made up of U.S. companies just under the S&P 500 in market capitalization, returned 26.6 percent in 2010. More than half of that gain was achieved in the last quarter alone.
Those who waded into international markets last year largely fared worse. The MSCI EAFE Index of large cap equities in international developed markets was up 7.8 percent for the year. Bondholders in many cases suffered from a poor fourth quarter, but were up 6.5 percent, according to the BarCap Aggregate Bond Index.
So how did you do? First you need to determine your investment earnings for the year. Take a look at your annual statements from your accounts, add the balances, subtract your personal and employer contributions for 2010, and then compare it to your 2009 statement.
Divide your 2010 portfolio earnings by the 2009 end of year balance to approximate an annual portfolio return. If you’re lucky, the statements will provide your personal 2010 return so you don’t have to wade through the fourth grade math.
Let’s say your return was 10 percent last year. Is that good or not? It’s impossible to know without having suitable benchmarks, or measuring sticks, to evaluate your performance. If you have a conservative 80 percent bond portfolio, then 10 percent would be tremendous performance. If you were invested completely in small cap U.S. equities, it would be atrocious.
This month we will be introducing the Laid Back Portfolio for those who need some guideline of investment performance. This is an investment strategy anyone can follow on their own or with the help of an investment adviser. It is comprised of 60 percent of the S&P 500 index and 40 percent of the BarCap U.S. Aggregate Bond portfolio. This is the classic balanced mix that is often used for those in the pre-retirement stage.
Let me warn you that the Laid Back Portfolio is not fancy. It does not include small cap stocks, international stocks, real estate investment trusts, commodities, high-yield bonds, hedge funds, or real return categories.
Although putting some of your money in these asset classes could be advisable, we’re going to keep it real easy for you. We will not time the market, other than rebalancing the portfolio on an annual basis. We won’t build in any tax or transaction costs, but will subtract a 1 percent annual investment fee deducted quarterly. This should be enough to account for mutual fund management and investment adviser assistance with such a Nilla Wafer strategy.
How did the Laid Back Portfolio do in 2010? It was up 10.6 percent for the year. Should you exult if you beat this handily or sulk if you didn’t? Absolutely not.
You need to adjust this benchmark to how much risk you’re taking with your portfolio. Those invested in mostly stocks should have done much better. Also, even good managers and advisers can have a bad year or two. It’s persistent underperformance that exceeds the natural randomness of returns that should concern you.
Dave Gardner, for the Daily Camera.