The SmallTrades investment portfolio {appended} is actively managed to seek large profits from the stock market. The goal is to exceed the U.S. Stock Market’s returns by investing in an exchange-traded stock-index fund {ETF} and a select group of stocks. The stock market’s returns are measured by a benchmark index named the Standard-and-Poors 500 Total Return index.
History
In past years, the portfolio returns generally underperformed the benchmark returns for reasons explained in the Annual Report for 2021. The magnitude of underperformance is graphically displayed in figure 3 of the 2021 Annual Report. After 14 years, the portfolio’s compound annual growth rate reached 4% compared to the benchmark’s 11%.
Today
The portfolio is now 15 years old. This is a report of the investment outcome of year 15. Figure 1 below displays the outcome as a series of annual rate-of-returns for the benchmark index [black bars] compared to the portfolio [blue bars] and portfolio assets [red and yellow bars].
Figure 1: Annual returns.
Figure 1 shows frequent gains above 0% during the 6th to 14th years with exception of the years 11 and 15. In year 15, the benchmark’s annual rate of return fell -18% [black bar in figure 1]. The portfolio fell -24% [blue bar], ETF declined -38% [yellow bar], and the stocks collectively rose +40% [red bar]. The remainder of this report will describe the events and partial success of year 15.
Remodeled portfolio
The strategy for year 15 was to reinvest in a growth-index ETF and increase the investment in stocks.
Figure 2: Market values.
Figure 2 summarizes the remodeling process by displaying bar graphs of monthly portfolio market values. The height of each stacked bar graph represents a monthly portfolio market value comprised of stocks [blue bar], ETF [green bar], and cash [black bar]. Changes in the bar heights for January, February, and March represent the remodeling process. To begin the process, December 2021’s ETF [SCHX] was replaced in January by a smaller investment in the growth-index ETF [SCHG]. I also sold 3 stocks [trading symbols NKLA, NVEC, RKLB] to collect extra cash. January’s cash was used to buy shares of stocks in February and March. In February, I purchased 3 stocks [trading symbols SMED, META, MKSI] plus additional shares of existing stock holdings. The effects of trading were essentially complete by the end of March. Excluded from figure 2 are the cash dividends of various holdings and privatization of SMED during April through November. Cash dividends were selectively invested in stock shares while SCHG’s dividends were automatically reinvested. Over the last ten months of year 15, the percentage market values of portfolio assets fluctuated between 28-33% stocks, 70-66% SCHG, and 1% cash. During that same time period, the allocation of principal held steady at 1% cash, 24% stocks, and 75% SCHG. By December 31, 2022, the up-trending blue bars in figure 2 indicated that the portfolio’s remodeled group of stocks sustained its increased market value despite shrinkage of SCHG’s market value.
Analysis of Year 15
If monthly variations in market value are firmly linked to stock market fluctuations, there should be no difference between percentage market values of the portfolio assets and benchmark index. Otherwise, the differences would diverge with the passage of time
Figure 3: Relative returns.
Figure 3 is derived from figure 2’s monthly market values of the stocks [blue bar] and ETF [green bar] compared with historic changes of the benchmark index [gray bar]. The monthly market values in 2022 are re-plotted as percentages of the initial market values on December 31, 2021; “100%” represents the initial market values. The remodeling process in January-March of 2022 created a remarkable divergence of percentage market values with the portfolio’s stocks rising above 100% while the ETF and benchmark dropped below 100%. After the remodeling period, stock market dynamics further reduced the market values of the ETF and benchmark index below their initial 100% without reducing the 140% gain of the portfolio stocks. In other words, the net effect of active stock trading in the first quarter endured year 15’s Bear market.
Plan for 2023
A pessimistic economic forecast for 2023 might entice other market participants to retreat from the stock market. I plan to hold fast by maintaining my current 75/25 allocation of investment principal and maintain a long position on portfolio holdings.
Copyright © 2023 Douglas R. Knight
Appendix
Small Trades Journal 