"Active" portfolio performance - did I do better than a passive strategy would have?

gadgetmind

The best (only?) way to track this accurately when money is going in (and out?) is by treating your portfolio as a unit trust.

On day one, take the total value of your portfolio and "issue" say 1000 units. So price/1000 gives value of each unit.

When fresh money goes in, take value on that day, divide by units in issue (1000) and you know how many more units to "issue" to reflect the new money. This may mean that you hold fractional units, but this is the way it works.

At any time, you know how you're doing as the current unit price can be compared with the original value.

http://news.fool.co.uk//news/investing/2010/09/20/stockpicking-are-you-as-good-as-you-think.aspx

Going back and doing this now will require that you know the exact portfolio value on the day that fresh money was injected.

masonic

Chargem wrote: »

I guess I showed my bias towards passive investment in my post, and I also assume you are defending active investment in yours. My opinion remains that if the OP did actually crunch the numbers, he would find out that he would have been better off using trackers, if only based on his self professed basic investment knowledge and fund picking via "ratings on various websites".

I don't really detect any bias in either of yours or Linton's earlier posts, but without knowing the OP's target asset allocation, or passive investments were available to the OP between 2002 and now, it would be impossible to say what the comparative performance would have been. Unless of course you are suggesting passive investers should always try to replicate the FTSE world total return index as closely as possible?

werutd

Thanks for all the discussion and suggestion. The are some good ideas of how I might better track this stuff in future. It may also be useful to try the spreadsheet suggested by chargem, and if there's a virtual portfolio that allows me to enter purchased in the past that could be ideal if a lot of work.

I didn't want to start another managed vs trackers debate, but I'd be surprised if most/more active investors didn't want to benchmark their own "performance" somehow, to know whether it's worth the effort!

dunstonh

It is best not to use US research for tracker vs managed as the US taxation system handicaps managed funds in a way that UK taxation does not.

masonic

beancurd wrote: »

Because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive management.

If only it were so simple in real life No one has an actively managed portfolio of all funds, but on average the statement is correct.

The trouble is the active funds don't all hold the same investments as each other, so in amongst that average will be some that overperform and some that underperform. The variation can be quite significant, so the question is can some funds overperform on average as a result of having different underlying holdings than the average fund?

Chargem

werutd wrote: »

I didn't want to start another managed vs trackers debate, but I'd be surprised if most/more active investors didn't want to benchmark their own "performance" somehow, to know whether it's worth the effort!

I think it's best to set yourself a financial goal, and then determine whether the time spent on your investment activities is worth the effort based on whether the goal is met.

As an example, if your investment pot was started to be able to purchase a holiday home in Spain upon retirement, and you end up with enough money to buy the kind of home you wanted when you retire, then the time you spent on your investments was worth the effort, even if you could have done things differently and ended up with a slightly bigger pot. With investing, you could have always done things differently in hindsight and earned more.

masonic wrote:

Unless of course you are suggesting passive investers should always try to replicate the FTSE world total return index as closely as possible?

It was just the first total return index I found from google and I used it because if I personally was going to buy a tracker I would go global. I also re-ran my spreadsheet with the FTSE100 index after reading Linton's post and came up with a similar number (closer to £51,000) with the same underlying assumptions. Again this is only napkin math, but unless the lump sum investments were made imminently before crashes I think on the balance of probability, a tracker would have outperformed.

masonic

Chargem wrote: »

It was just the first total return index I found from google and I used it because if I personally was going to buy a tracker I would go global. I also re-ran my spreadsheet with the FTSE100 index after reading Linton's post and came up with a similar number (closer to £51,000) with the same underlying assumptions. Again this is only napkin math, but unless the lump sum investments were made imminently before crashes I think on the balance of probability, a tracker would have outperformed.

What if it was split between global equities, gilts, commercial property and gold? The asset allocation would make a lot of difference to the return. You can underperform the market as judged by one index significantly even with trackers if your asset allocation is different.

Linton

beancurd wrote: »

I maybe could have expressed it better, but we are both correct. The market _is_ the average, so on _average_, managed funds will underperform the market over time due to the cost of management. Passive investing sets out with the same goal, but with a minimal cost, and so while it also underperforms the market it will do better as it has less overhead.

You can read a lengthier logical description here which I now paraphrase.

It is a fact that before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar.

It is a fact that after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.

The market return is a weighted average of the returns on the securities within the market. Each passive manager will obtain precisely the market return, before costs. From this, it is a fact that the return on the average actively managed dollar must equal the market return.

Active managers must pay for more research and must pay more for trading including security analysis, employment of brokers, traders, specialists and other market-makers.

Because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive management.

If only it were so simple in real life No one has an actively managed portfolio of all funds, but on average the statement is correct.

There are so many BUTs one can come up with......

1) The day to day movement of the stock market is (I suggest as I dont know the numbers) largely driven by massive speculation - people looking for a very short term gain from major trades around minor changes to prices. It does not seem immediately self evident that the average of such operations will lead to an average return for those with a long term holding.

2) The investing world is divided onto multiple geographies, sectors and sub sectors. What does an "average" mean? What geographies/sectors a fund invests in pretty obviously far more important than a % or so difference in fees. For example, in my view, a fund based on the FTSE100 is a poor investment no matter whether it's managed or passive. Conversely a balanced income fund could well be a pretty reasonable investment again independently of whether it is managed or passive. BUT there arent many (any?) convincing passive balanced income funds around.

3) Simple return is far from being the only criterion in choosing an investment. The important thing is return relative to the risk appropriate for the investor and for the investor's objectives. I see no way an "average" return tracker can provide this for everyone in all circumstances

masonic

beancurd wrote: »

I agree with you both, yet add that there are long term risk/return profiles for sectors/indices. By mixing these, one can invest in the knowledge of a long time historical risk/reward. Personally, I've chosen an approx 4% reward with 8% risk, as a younger man I may have chosen a 6% reward with 15% risk, and as a spring chicken gone even more adventurous. Books on PI set out how to do this, but you do in effect begin to actively manage your own portfolio.

I agree one of the biggest virtues of trackers is knowing what you've bought into. It might surprise you that my two largest holdings are trackers and overall my portfolio is mostly passive. However, I still have sufficient active holdings that I would dissatisfy most passive purists. The reason? There are certain areas to which I want exposure and I don't believe any available tracker is appropriate - that may be because there isn't one, or that the available trackers include things to which I don't want exposure, or the available trackers are not very low cost. In the end, I am looking for the most appropriate investment vehicle for my needs and I try not to get hung up on the philosophy behind it.