Comparing portfolios over time

[sl1c3r]

I'm interested in comparing my current portfolio to a different portfolio over, say, the past 10 years (could use 3 or 5, I just thought I'd use 10). Currently I'm using Morningstar's portfolio tool. I've setup a couple portfolios with with specific funds and for all of them used 12-31-01 (10 years ago) as the purchase date, $1 as the purchase price, and the number of shares equals the allocation %. Then I look at the performance of each portfolio and compare the total return for each year in the past.

Is this an accurate (or even mostly accurate - 95%) way to compare portfolios over time? If not, is there a relatively easy way to do this?

ETA: Also, if this is a decent way to do this, is there a better portfolio tool than Morningstar? I'd actually like to be able to see performance over times other than just a full year (i.e.: quarterly, monthly)?

[jteezie]

You could do that and it would be the easiest way, but 10 years is an awfully long time frame. The companies in question were likely in different stages of development or even different industries 10 years ago from now. This introduces some concerns with survivor bias or backward looking bias.

Example of backward looking bias might be Apple. 10 years ago they were not the largest company in the world nor did they sell ipads - a completely new market. If you selected Apple in your portfolio because it did exceptionally well, you let knowledge of "future" events effect your comparison. Hedge funds demonstrate survivor bias. Some fail some succeed. The ones that fail sometime in the 10 yr period are not even considered in your comparison, so you have a tendency to compare only the winners. This inflates how well you would hypothetically do.

You might be better off identifying what indexes the companies are trying to match/beat. So instead of Apple, do a portfolio (benchmark index of) 10% tech.

[sl1c3r]

Thanks. I didn't really think about backward looking bias. I'll keep that in mind.

Fortunately, I've only been using index funds in these test portfolios so I don't think that matters, does it?

My goal is to see how different index fund based portfolios compare against each other AND against my current advisor traded portfolio. I've been with this advisor for about 3 years now and it's been up & down. I'm seriously considering dropping the advisor and using an index fund based portfolio.

Currently my portfolio is up 1% over S&P 500 for the 3 years and 2011 S&P destroyed my portfolio by 10%. Last year at this time my portfolio was up 13% over S&P for the previous 2 year period.

Anyway, I really don't have a lot of time to find good investments and make sure my diversification / allocations stay in line with my needs -- which is why I have an advisor doing it. It lets me concentrate on my career which is, of course, the foundation of my investments at this point.

I'm hoping I can find an index based portfolio that (based on previous 3, 5, & 10 year history) I'm comfortable with and I can simply use and ignore -- or maybe look at once every year or two.. Otherwise I feel I'm at the mercy of an advisors (apparently) wild swings of +13% ~ -10%. However I do have (and want) a fairly aggressive allocation so maybe that's the kind of volatility I should expect.

Thanks again and any other comments are certainly appreciated.

[disneysteve]

My goal is to see how different index fund based portfolios compare against each other AND against my current advisor traded portfolio. I've been with this advisor for about 3 years now and it's been up & down. I'm seriously considering dropping the advisor and using an index fund based portfolio.

I feel I'm at the mercy of an advisors (apparently) wild swings of +13% ~ -10%. However I do have (and want) a fairly aggressive allocation so maybe that's the kind of volatility I should expect.

I think a good advisor should be willing and able to run the comparisons for you. If he isn't willing to illustrate his performance vs. the index fund portfolio, then I would seriously consider a new advisor (if any).

That raises the second question - do you need an advisor at all? I'd say the answer is almost certainly no. Take a look at the expense ratios of the funds you currently own and any load paid or management fees. Compare that to the expense ratios of the index funds (which are no-load). That alone might change your mind.

As for the volatility, that's pretty much the norm in the market today. Before switching for that reason alone, see how volatile the indexes have been. You may find similar performance there.

[sl1c3r]

My main reason for having an advisor is that they're (at least supposed to be) knowledgable, professionals, who know their job, knowledgable of all the tax implications, etc.. when it comes to investing. Before using this advisor I did the research and upkeep of my portfolio and it took a LOT of my time -- keeping me from doing the extra work I needed to advance my career in software.

Admittedly, I was looking for low-cost, "better than average" funds (non-index) and trying to keep up with when they were doing bad and making changes / rebalancing as needed. It was just draining... Is it reasonable to just use, say, one of the Lazy Portfolios that I think (using Morningstar's portfolio performance tool) shows a reasonable return and forget about it?

It's this kind of thinking that I'm trying to compare portfolios that I find on the internet against my current portfolio and the S&P. I don't know if that's good or bad but, it seems like there's just a lot involved in trying to come up with a portfolio totally on my own, that's well diversified and will do at least as good as the S&P.

Also, if the returns that my advisor can get are better than the expenses that he charges combined with the funds he uses should I really care what those expenses are? Again, two out of three years my advisor beat the S&P 10% and 6%; the third year he lost by 10% and over the entire three years is up 1%.

(BTW, I keep referencing the S&P 500 as the general benchmark I'm comparing to. I don't even know if that's valid.)

Thanks!

[disneysteve]

if the returns that my advisor can get are better than the expenses that he charges combined with the funds he uses should I really care what those expenses are? Again, two out of three years my advisor beat the S&P 10% and 6%; the third year he lost by 10% and over the entire three years is up 1%.

(BTW, I keep referencing the S&P 500 as the general benchmark I'm comparing to. I don't even know if that's valid.)

Thanks!

I think you just identified the real issue. Make sure you are comparing comparable investments. The S&P 500 may or may not be the right benchmark to look at. It depends on what the other funds are. If they are large company stock funds, that's fine. If they are small company value funds, for example, then the Russell 2000 is probably the index to look at.

[kv968]

I think you just identified the real issue. Make sure you are comparing comparable investments. The S&P 500 may or may not be the right benchmark to look at. It depends on what the other funds are. If they are large company stock funds, that's fine. If they are small company value funds, for example, then the Russell 2000 is probably the index to look at.

Steve's right. A lot of people compare their PORTFOLIO to the S&P when their portfolio probably looks nothing like it. I mean its a good barometer of the market and some use it because its easy and they say "well, I COULD have just bought and ETF and had that". Well I could have bought Apple stock a decade ago too but I'm not comparing my portfolio to that stock's performance. I wish I could

What I like to use as a benchmark, albeit its not perfect either but is more representative of what I hold than just the S&P, is a target date mutual fund that is allocated the closest to what I hold or "should hold".

The problem even with doing that is the dollar cost averaging effect. When you back-test funds you're going to get the yearly average that the fund returned. In the meantime if you'd been putting money in all year long your return could look a whole lot different in some cases. However if you just use one fund (i.e. target date) to compare against your returns you can see the volitility more clearly in it and see how true of a reading you're getting of the absolute return you would have gotten. Heck, if you've got the time you can get a true return on the fund if you go back and plug in the numbers when you would have dollar cost averaged into it. Maybe that's the kind of software you're looking for but I don't know of any that would automatically do it for you.