Before my days as a DIY investor, I mainly invested my money thru mutual funds and Exchange-Traded Funds (ETFs).
Back then, as a Canadian, some of my popular choices included XIU (iShares S&P/TSX 60 Index ETF) and RBF266 (RBC Canadian Dividend Fund) as I already was leaning toward dividend investing.
I now use these two funds as benchmarks to measure my performance as an investor.
Be careful here, I’m not advertising or promoting these two particular funds in any way. You should rather view them as examples or as proper representatives of their asset class. Many other funds could have been used and the illustration would have probably been pretty similar.
Some of you might think that beating these funds does not represent much of a challenge and that they constitute a pretty poor standards.
I will remark that in reality, it’s a struggle for most individual investors as they have a hard time to simply beat the markets. All of this because they often let emotions get in the way of their investing decisions.
Improving on What I Got Before
Personally, I use these funds as a point of reference as they represent almost exactly what I was getting out of my investments before I really took manners in my own hands.
Rest assured, my Investing Goals are much more aggressive as these fund benchmarks are a floor to what I consider acceptable.
These funds also constitute a viable and probable option for the average Joe. That’s another reason to use them as a comparable.
Even though experienced DIY investors tend to skeptically depict them, mutual funds like RBF266 can be a great way to introduce newcomers to the vast world of investing. They are easily accessible at any local bank. They provide instant diversification with a minimal initial investment (from 500$ to 2000$). Afterwards, subsequent shares can be acquired in very small amounts (usually as low as 25$). That way, mutual funds can be a perfect candidate for systematic investment using pre-authorized purchase plans.
One of the big flaws of mutual funds is expensive fees.
That’s where ETFs constitute the next logical step to successful investing with their much lower fees. Furthermore, opening a self-directed brokerage account and trading ETFs can be an excellent learning process as novice investors progressively get exposed to the technical aspect and subtleties of DIY investing.
Replicate While Reducing Fees
In 2008, as a rookie DIY stock investor, trying to keep things simple at first, I only tried to match these funds long-term performance while saving on fees as much as possible.
Because key positions of these funds don’t change much over time (they often have a pretty passive approach), information on how to grossly mimic them is relatively easy to obtain. In that sense, a list of their top holdings provided useful investment ideas to build the basic core of my DIY Portfolio.
Because it would be too costly to buy every stock in a fund, you cannot exactly reproduce it. But it can still give you fair indications on securities that can produce reliable returns. It can also give you an illustration of an asset allocation that actually works.
You will still have to do some research and then pick your favourites. You should be able to achieve adequate diversification with a select group of 10 to 12 stocks.
This approach may sound kind of simplistic but it can nonetheless, provide a good head start and help build confidence as an investor.
After humble beginnings, with time and experience, I was eventually able to refine my stock picking abilities.
How to Do the Math
With all available resources to us in this modern Internet era, keeping score is quite easy.
I still took a little time to set things up the correct way for my portfolio.
No need to account for every transaction inside the portfolio, you just have to do the math for money deposited or withdrawn. Because I only put new money in a couple times a year, this process is pretty simple for me.
I use an Excel worksheet. With one column listing amounts and another column listing corresponding dates, the XIRR function does the rest.
Note that withdrawals have to be entered as negative values. For the actual calculation to work, you also have to make a final entry as if the whole portfolio balance was withdrawn today (or at any date you want your return computed).
To obtain the corresponding fund balance and return, you just have to enter the same amounts as if you blindly invested in the fund on the same dates.
To make sure the comparisons remain as realistic as possible, I also consider funds distributions and record them accordingly. This only adds 4 additional entries per year for each fund.
A more refine method that I don’t use or recommend would be to translate each portfolio transaction into a fund transaction. For instance, you could record entries for every stock buy or sell inside your portfolio. I simply think it’s a waste of time. This method is also not practical because it’s almost impossible to account for dividend reinvestments and some operations like foreign exchanges.
Although the initial setup took me some time (it can be done in less than an hour), I now only take a couple of minutes a year to record all these operations.
All data can be automatically updated using a basic Excel web query. This way, you could even compare your results to these benchmarks on a daily basis. I don’t actually do it that often because I don’t consider it healthy to look at your portfolio every day. Furthermore, only long-term returns really matter to me.
I truly think that if you do it from time to time, using fund benchmarks to measure your performance is a great way to see if your investment choices are getting your portfolio in the right direction.
Better Results Than Expected
To conclude, let’s see how my portfolio did so far. Am I keeping up with these fund benchmarks?
To tell you the truth, I’ve looked at those stats before and already knew I was doing well. But maybe not that well...
Back in 2008, when I started to gain control over my portfolio, I was tentatively hoping for a 2% improvement, corresponding to saving on fees. Now, I’m glad yet surprised that the gap is more around 6-7%.
I really don’t intend to dwell, but today, I’m very happy to have over $35k more in my pocket just because I now deal with my investments myself.
How can that be so much? I can’t completely explain it.
I just consider myself an average stock picker and I still make occasional mistakes. Part of the explanation is probably that my portfolio is a bit riskier than those funds. The best reasons that I came up with are that I’m able to keep my emotions in check and that I always focus on the long term.
Then again, fund managers don’t envoy as much freedom as an individual investor like me. They have to contend with thousands of hard to please investors that frequently take money in and out at the wrong time.
I’ve noticed something else: strangely, dividends (around 4%) and fees (2%) closely add up to this notable gap (more than 6%). As if they charged significant fees and didn’t really pay up dividends? But forget it; it’s probably just an odd observation.
Thanks for reading and I hope my unique point of view about how to use popular funds to evaluate portfolio performance was interesting and inspiring for you.
Please take a moment to tell me about it.