It's time to compare the performance of our portfolio in the year 2013 against index investing.
As regular readers know by now, I have chosen MSCI all country world (ACWI) index as our benchmark index. In 2012 we significantly underperformed, but last year we took back the difference and are leading our benchmark investment by a small difference.
Our performance during 2009-2013 has been as follows:
Our portfolio is currently defensive (less risky) and less volatile than the ACWI index. Therefore, it has underperformed in bull market and overperformed in bear market - until 2013. The explanation is our largest position & turnaround bet - Nokia, which gave quite a boost to the overall portfolio by doubling.
Also, Western Digital - which also happens to be one of our largest holdings - rose 100% in dollar terms. Apart from UPM, which is luckily yet another large position, I don't recall above average returns this year. However, these three were enough to boost performance from below average to above average in 2013. Apart from Nokia I haven't been trimming down the winners. Nokia just grew too big within the porfolio. I used the opportunity to offset losses and to grow other promising positions.
Our benchmark index 2009-2013 (based on MSCI All Country World Index; Net; Euros)
I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.
About the "benchmark investment"
I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.
The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)
The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.
About calculating the yearly returns
The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]
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