The years 2014 and 2015 were quite a time in the stock market. I cranked some numbers recently to review my market performance over the past two years and came to a certain realization about it, upon which I based the title of this post.
Prior to 2014 my portfolio mainly consisted of 401k mutual funds and I didn’t pay much attention. It would have been a good idea to do so as the market has had a great run beginning circa 2009, and I was a little more than fashionably late to the market as an active investor.
Appreciation vs. Total Return
To be clear, there are multiple ways that market numbers are often bandied about. Sometimes it’s the value of the stocks (or more accurately the price of the stocks). Other times it’s the value of stocks plus dividends received, and which are then reinvested. This is known as total return.
Those figures are theoretically possible to emulate if one is running a large portfolio such that transaction costs are so small a proportion of each trade as to be negligible. Certainly the latter case of total return sets a higher bar. It also reflects a more complete picture.
Breaking Out of the 401k
Anyway, I shifted from mutual funds to individual stocks after changing jobs. Doing so let me rollover my 401k to an IRA and begin to manage things myself rather than only having the ability to choose from about two dozen funds – all of which were mediocre performers with relatively high fees.
It’s been a bumpy ride of late for almost everyone. Fortunately, I have a 25 to 30 year outlook so there’s less short term concern than for many others. According to (Don’t Quit Your Day Job), the 2014 and 2015 of the Dow Jones Industrial Average (DJIA) and the 2014 and 2015 Standard & Poor (S&P) 500 returns were as follows.
My total return performance for those years was 10.89% (2014) and 2.21% (2015). No one would say I’m at risk of being the next Warren Buffett. However, I didn’t do anything bad either.
In the coming years my stock investment goals are twofold: (1) Become a better investor by consistently beating the market through solid use of advantageous strategies and (2) gradually shift the proportion of my portfolio from pre-tax (IRA) to after-tax (Roth IRA and non-retirement).
The reason I still have a traditional IRA is due to a work conversion, and there’s never a convenient time for getting walloped with an additional tax burden. I’d like to gradually convert that to a Roth IRA and be done with the IRS for simplicity.
The liquidity benefit of stocks (and to some extent the Roth IRA) is worth something. As is the ability to be hands off. So I’m going to stick with it on some level. The downside, though, is you can lose your shirt. Maybe your pants too.
Granted, I’m no market genius but it seems like investing in the market this way is akin to buying at full retail when those in the know are doing so at wholesale. If you know what you’re doing and have the stomach for it, your own business may be an option with far more returns. And investment real estate, which I’m certainly partial to, can be a pretty simple one.
You can lose 100% of a stock due to no fault of your own. But there are only about five ways to lose a building. And I crank out returns of 7% (unlevered) to 12% (levered) every year before depreciation with relatively high confidence and low effort.
But if I am to diversify and stay in the market, I definitely want to learn how to invest in stocks far better than I have until now.