DIY Investment Portfolio: 5 Year Annualized Returns

Do it yourself investing is something I am very passionate about.  I love learning about companies, their history and the returns investors can generate if they are patient.  When I am at the grocery store, I love to see people purchase products from a company I own.  Sometimes I even mentally use the dividends from these companies to pay for monthly expenses.  Don’t get me started if the Mrs. brings home the wrong brand.

This immersion in the selection process of great companies sets me up to handle any downturns that may unfold.   I have watched multiple investments deteriorate by 50% or more, only on bad news.  In a few of the cases the underlying business was still increasing earnings.  With the market and individual securities extremely volatile at time, it can be difficult to sit on your hands and do nothing.  But usually, nothing is the correct course of actions.  Doing nothing also saves me money from taxes and commissions.

Best yet, selecting my own companies saves me from fee’s.  Fee’s from ETF’s.  Fee’s from mutual funds.  Fee’s from advisors.  It seems like everyone is jockeying for a hand in your wallet.

Why DIY Investing?

I previously mentioned this, but to repeat – I invest in index funds primarily in our retirement accounts (in addition to fixed income.) In our taxable accounts, I invest in individual securities with as little turnover as possible to minimize the tax implication. I think for most investors they will do better with index funds. However, three primary reasons why I invest in common stocks are:

  • Investing is my hobby. I measure my performance against benchmarks and attempt to outperform the usual investing benchmarks. I have always been a bit of a gambler, but only when I think I have an advantage. Back when I was pursuing my master’s degree I won many poker tournaments.
  • Active Investing allows me to personally select what I feel will provide the best risk adjusted returns.
  • Active Investing helps me achieve my goals for my taxable portfolio. Overtime this portfolio will be used as income to pay for our monthly expenses. A far greater yield can be generated from your investments than what he S&P is currently providing at 1.91%, with potentially less volatility than the S&P 500 index.

Investment Portfolio Ground Rules

  • Understand each Investment. If I truly don’t understand how the business is making money, I avoid it.  Some businesses I understand better than others, but when an investment is made,  I tend to learn more over time the if my cash was on the sidelines.  If I am not completely confident, I will only allocate a small position to that particular investment.   Having some skin in the game provides incentive for deeper due diligence.  As the position grows, the more time I allocate to learning and analysis.
  • Invest for total return.  Some investors only focus on one strategy, like dividend growth stocks.  I look for investments wherever they are found.  (This may change over the next five to ten years to focus more on yield.)
  • Measure Results to S&P 500 benchmark (See below)
  • Diversify appropriately.  I currently hold 35 different companies in my taxable portfolio.  This has increased recently.  I generally do not like to hold more than 30.  Currently the top 5 investments make up 50% of the invested capital.  I am targeting a max allocation of 10% to a single holding.  The companies are made in diverse industries and locations.  European based companies now make up 30% of the portfolio.
  • Categorize each investment and know why I own it.  When I make an investment I categorize it.  This helps me understand why I invested my families hard-earned money into the company.  Sometimes an investment crosses boundaries and sometimes it even transitions  between classifications.  For instance a fast grower might mature and start a dividend growth policy.   Then the investment becomes a dividend growth stock.  A good example of this is Starbucks, who started its dividend at $.05 per share in 2010..  We still anticipate Starbucks to grow, but we also now expect an ever-growing income component.
    • Dividend Growth Stocks – I absolutely love dividends.  Getting a dividend yield from stock holdings is a great way to increase your wealth over time.   You can reinvest those dividends back into the same company or you can pool your income and redeploy the funds into other companies.  The allocation of our portfolio invested in dividend growth stocks will grow to provide additional income to fund our lifestyle later in life.  Usually the companies that I invest here are well know blue chip stocks with long dividend histories.  These are the companies we usually like to hold for a long time and hopefully gift to our children.
    • Value Stocks – Are companies trading a steep discounts to the intrinsic value.  Usually I make a purchase when I think the company is undervalued by 50% or more.  These are harder.  There are many successful investors who have focused in only on this.  Usually there is a special circumstance unfolding with the company to temporarily drive the valuation down.  Some of these situations I have come across are:
      • Asset Plays
      • Turnarounds
      • Cyclical business or industry
      • Mergers and Acquisitions
    • Growth Stocks – These are companies that are rapidly growing earnings and are anticipated to continue to grow earnings well into the future.

5 Year Annualized Return (Sept 2012 – July 2017)

I used to calculate the S&P annualized returns myself until I found this handy calculator for the S&P 500 found here at DQYDJ.  The S&P 500 and the overall stock market has been providing outstanding returns.  The annualized return, with dividends reinvested was 13.581%

My Performance for the same time period was 14.92%.  Not exactly killing it, but I believe my portfolio of stocks is less risky than the S&P 500.  This is a time based calculation for annualized return and includes dividend reinvestment and commissions.

You might be thinking, wow great job you only beat the market by 1.4% and you spend countless hours researching companies.  Why do you do it?

  1. As I said before, investing is my hobby.
  2. 1.4% over a lifetime can make a huge difference.  See the table below.  That 1.4% could add almost two million to my net worth for every $100,000 invested over 30 years.  Granted, I don’t think we will see the type of 5 year return over the next thirty years, but you get the picture.
Initial Investment 100000
Year 13.58% 14.92%
1 113580 114920
2 129,004.16 132,066.06
3 146,522.93 151,770.32
4 166,420.74 174,414.45
5 189,020.68 200,437.09
6 214,689.69 230,342.30
7 243,844.55 264,709.37
8 276,958.64 304,204.01
9 314,569.62 349,591.25
10 357,288.18 401,750.27
11 405,807.91 461,691.41
12 460,916.62 530,575.76
13 523,509.10 609,737.67
14 594,601.64 700,710.53
15 675,348.54 805,256.54
16 767,060.87 925,400.81
17 871,227.74 1,063,470.62
18 989,540.46 1,222,140.43
19 1,123,920.06 1,404,483.78
20 1,276,548.40 1,614,032.76
21 1,449,903.68 1,854,846.45
22 1,646,800.60 2,131,589.54
23 1,870,436.12 2,449,622.70
24 2,124,441.34 2,815,106.41
25 2,412,940.48 3,235,120.29
26 2,740,617.79 3,717,800.23
27 3,112,793.69 4,272,496.03
28 3,535,511.07 4,909,952.44
29 4,015,633.48 5,642,517.34
30 4,560,956.50 6,484,380.93

Looking at IRR or annualized growth rate vs. annual results

I want to see if I am performing well versus the market over time.  I am less concerned if I beat in any given year.  If not, I may lose faith and change my strategy.

If I was looking on an annual basis it would look the table below.   I think for the underperformance in 2014 and 2015 was primarily due to two reasons:

  • A higher allocation to energy companies
  • A higher allocation to cash and bonds.
Year My Portfolio S&P 500
2012 19.07% 15.89%
2013 31.42% 32.15%
2014 9.23% 13.52%
2015 -1.48% 1.36%
2016 33.33% 11.74%

Over time, I plan on creating a series of posts on DIY common stock investing.  As a teaser please look out for part 1, Identification of Durable Competitive Advantage in the coming weeks.





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