I wish a very happy new year to all Bogleheads!
For this last month of the year, I will report my latest return numbers, then I'll look back at my overall 2015 returns and compare them to a proper benchmark to evaluate my tracking error
Here are my personal portfolio returns
* for December 2015.
Target asset allocation 50/50 using Taylor Larimore's fantastic Three Fund Portfolio
adapted for a Canadian investor:
The actual weightings in my portfolio may differ slightly from target due to various factors such as the rebalancing policy and a small "cash drag" (because part of my emergency fund sits in a short-term bond fund in my brokerage account, and is thus included in my returns).Trailing portfolio returns (time-weighted returns, comparable returns)
- VCN (25%): Total-market domestic stock index ETF
- VXC (25%): Total-market international stock index ETF
- VAB (50%): Total-market bond index ETF
Portfolio returns as of 12/31/2015
1 month 0.23%
3 months 2.40%
6 months -0.53%
1 year 3.35%
I encourage Bogleheads to use the wiki:Calculating personal returns
spreadsheet if they wish to calculate and report comparable
personal returns in a uniform manner
As promised, it's now time to discuss my 2015 returns.
In 2015, domestic Canadian stocks did poorly (-8.73%) dragged by a big oil segment. On the other hand, while international markets didn't do anything stellar in their local currencies, the Canadian dollar dropped in value, so international markets did outstandingly well (17.03%) for a Canadian, due to currency exchange rates. As for bonds, they did OK (3.46%).
Philosophically, I hold a three-fund portfolio because I want to harvest the return of the average invested dollar
in each market (using Prof. William Sharpe's vocabulary
) minus as little in fees as possible. This means that I don't expect to get glamorous returns; on the contrary, I only expect to get average
returns, year after year after year, but reliably
. I'll beat many other investors, but slowly and quietly, like the Tortoise of the Fable.
But, life happens, and I can't keep my portfolio perfectly balanced. I incur some costs, too. Among other things, this year I transferred my accounts to another discount broker to get the possibility of buying my ETFs commission-free. But, my old broker charged me exit fees. So, I like to get an idea of my personal tracking error.
If there was a LifeStrategy-like fund, in Canada, with an allocation identical to mine, I would use it as benchmark. Unfortunately, there isn't. So, I did the next best thing: I calculated the 2015 return of a custom benchmark
using the monthly returns of my three ETFs as reported by Morningstar.ca (VCN
). In other words, for each months, I calculated a benchmark return using the following formula:
- benchmark_monthly_return = 0.25 X VCN_monthly_return + 0.25 X VXC_monthly_return + 0.50 X VAB_monthly_return
Here's a table showing my Benchmark's monthly and yearly returns and the returns used to compute them:
Code: Select all
Benchmark VCN VXC VAB
January 4.45% 0.37 7.93 4.75
February 2.03% 4.28 4.03 -0.1
March -0.69% -1.88 -0.17 -0.36
April -0.63% 2.67 -2.3 -1.45
May 0.57% -1.46 3.39 0.18
June -1.55% -2.89 -2.09 -0.61
July 2.09% -0.41 5.75 1.5
August -3.13% -4.05 -6.32 -1.08
September -1.59% -3.91 -1.94 -0.25
October 1.63% 1.87 5.2 -0.28
November 0.41% -0.29 1.79 0.06
December 0.21% -3.02 1.49 1.19
2015 3.62% -8.74 17.04 3.46
The overall yearly return was calculated using the following formula:
- yearly_return = (1 + January_return) X (1 + February_return) X ... X (1 + December_return) - 1
Comparing my portfolio's return (3.35%) to my benchmark's return (3.62%), I can see that I have suffered a -0.27%
tracking error. Considering that my portfolio is not rebalanced monthly, but is rather subject to frequent partial rebalancing through contibutions, and that I incurred commission fees (and a small cash drag), the small size of the error gives me confidence that I didn't screw up the data entry.
As you can see, the return spreadsheet is useful to verify that am tracking my benchmark. (If I'm not, I'll know that I screwed up my data entry, as I use a three-fund portfolio and I have no reason not to get similar returns to my benchmark's).
I can easily imagine a LifeStrategy or TargetRetirement fund investor shaking his head and thinking that I should simply look at my portfolio's balance and forget about all these return calculations.
* These are not investor (internal, XIRR, money-weighted) or Beardstown Ladies returns.Disclaimer (i): The main reason I participate in this thread is to help Bogleheads learn about properly calculating their personal returns and discover that there are different types of returns (investor vs portfolio). Unfortunately, many investors calculate their returns incorrectly.Disclaimer (ii): What is the use of knowing one's personal returns? Not much, as it is a big mistake to project these returns into the future. I only see one interesting use: discovering that from month to month, past returns vary widely, helping one realize how useless they are.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR