I use the investment strategies of “speculation” (timing the market to earn quick profits) and “indexing” (holding index funds for a long time) to earn profits from the stock market. Unfortunately, my portfolio underperforms the U.S. stock market and needs revision. An analysis of annual returns indicates that I could improve portfolio performance by doing more indexing and less speculation.
Before 12/31/2007, I made annual contributions to a tax-deferred brokerage account that was created and managed by a financial advisor. After retirement in 2007 I stopped adding cash to the account and began making the investment decisions.
The performance of my portfolio is shown in the following chart:
At the baseline date of 12/31/2007, my portfolio’s market value was $1 for every 95 cents of cost basis. The time course of the year-end market value (blue dots) is plotted as a series of ratios to the baseline market value. Also, the year-end cost basis (brown dots) is plotted as a sequence of ratios to the baseline cost basis. The market value and cost basis plunged downward during the 2008 Recession and never fully recovered. By comparison, the black-dotted line represents a hypothetical $1 investment in the benchmark portfolio named the S&P 500 Total Return Index. The benchmark also crashed during the 2008 Recession and then recovered with steady growth. The portfolio’s market value has a 5-year CAGR of -5.32% and the benchmark’s 5-year CAGR is 1.38%. By these measures, my portfolio underperformed its benchmark by a staggering 6.7% difference in CAGRs. An analysis of the annual returns showed that speculative trading of stocks explains the underperformance.
The red colored securities were bought on speculation and the green colored securities are index funds. I plan to modify the portfolio by selling the red colored holdings and using the proceeds to increase the cost basis of the green colored ETFs.