Saturday, January 28, 2012

Portfolio Allocation and Performance II

Here is my portfolio performance expressed as $10,000 invested in May 2003 which would be worth $45,000 today. Over the last 9 years the portfolio's value quadrupled or in other words it doubled every 4.5 years and then some. Using the rule of 72, that suggests an annual rate compound rate of return of 72/4.5= 16%. Not bad for a stock market that many claims to have resulted in an annual return of 3-4% over this so-called 'lost decade'.

So does that mean that this blog writer is an investment genius? I wouldn’t count on that!  Some, or better a lot of serendipity was involved. In the beginning of this decade I worked for one of Canada’s premier petroleum companies; in my books it is ‘the best’.  I received options and participated in the company savings plan. You may recall my earlier postings that state that with normal savings and returns you will become 'well off', but that to become truly wealthy you need a break. Many people get breaks during their life and do not take advantage of it. I described a number of these breaks and how to use them to your benefit in earlier post; I certainly used mine. My break was my employment at this great company. But already in the 1990s did I overweight my investments in oil & gas – a sector I was quite familiar with.  Between 1998 and 2008 the sector exploded and I certainly did profit.

The graph above shows how I fared without the oil and gas sector investments. Now, $10,000 invested went to $18,000 in 2012 – not quite a double. So, for convenience sake let’s assume I doubled, which results in an annual compounded return of 72/9 = 8%. Ok. Ok!! I still outperformed the stock market but by a lot less. Let’s dig in a bit deeper and see what is left of this investment genius after that!  Let’s look at what I did between May 2008 and today.

Oh, oh! The ‘genius’ underperformed!! How smart is he now? $10,000 went to …. $10,000. No losses no gains!  What happened?  Answer: those same oil and gas stocks underperformed! Although I did cash in on some of the profits between 1998 and 2008, I was still on overweight in 2008 -2010. Thereafter, in the summer of 2010 Oil&Gas really started to really underperform. 

Next question is, then how did my non-oil&gas holdings perform between 2008 and today? Well look at the figure above. Now isn’t that interesting?  Those investments outperformed the market until the Spring of 2011. In fact if you go back to the non-oil&gas portfolio graph of 2003-2012,you can see that another big change happened around September 2011. So lets discuss that in the next post.

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