Portfolio Allocation and Performance I

 Recently I have started to analyze my portfolio performance as far back as 2003 (that is how far my Quicken files go – older files got corrupted and the data was basically lost). What motivated me? Well, simply the current stock market and all the screaming media types we have been coming across during the current market hysteria. Also, my investment reading list has focussed a lot on long term performance and as regular readers of this blog may have noticed, Jeremy Siegel, David Dreman, Ken Fisher and more recently James O’Shaughnessy are amongst my favorite authors. I have always been aware of the importance of asset allocation, it is kind of an intuitive truth to me, hence the title of this blog. However, I have not read a lot of books on asset allocation until recently.  I looked for one recommended by some sophisticated fellow investors and came across William Bernstein’s ‘The Intelligent Asset Allocator’. I am sure that any resemblance with Benjamin Graham’s ‘The Intelligent Investor’ is purely coincidental (yeah right!).

It was definitely a book worthwhile reading and it seemed to draw on similar data sources as James O’Shaughnessy's work.  One of the main messages I took away from it was that diversification works and may even augment performance during rational times. However, during stock market panics there is little protection against a falling portfolio value. At best your paper value losses during such events are about 25% less than that of the overall market. The 2008-2009 collapse was the the most severe since the Great Depression with some markets losing over 55%. Contrast that to the heaviest losses reported by William Bernstein of 35% and more typically of 25%. Of course, over the period that follows such a market collapse and if you held on rather than sold during the collapse, you’ll do just fine. If you have the nerve to add cheap stocks at heavily discounted prices during such a bear market you will do even better.

How was my own performance over the last 10 or so years? Although I am suspicious of bugs in Quicken’s software (things don’t always ad up correctly) it is the best personal finance software around that I know. One of its newer features I just love – it is a series of asset allocation and investment portfolio performance graphs. Pity it’s tracking of non-stock market investments such as real estate is not that good and it is not included in the above mentioned graphs. So, we’re just looking at the performance of my investment portfolio and try to break it down so we can see the effects of stock allocation on performance. I’ll show a fair bit of graphs, so we’ll spread this topic out of several posts.