Sunday, April 30, 2017

Is an 8.5% Return an improbable expectation?

Jason Zweig's column "Intelligent Investor" in the Wall Street Journal on Saturday April 29, 2017 targeted investors who believe in miracles like expecting to earn 8.5% on average annually after inflation.   He writes that individuals are not alone in believing in the improbable.  He notes that institutional investors have similar expectations.

The article is well written and timely as many investors have moved from actively managed portfolios to passive portfolios.   It seems that the expensive active managers have not delivered better gains than passive portfolios.

I buy into some of that as few working people have the time or take the time to invest their own portfolios.  Some do and most of those that I know do better than either passive portfolios or hedge funds when measuring return over time.

I have one portfolio that has 5.25 years of history.  I finished building the 2011 portfolio in November 2011.  That portfolio is now into the first quarter of the 6th year for a holding period of 5.25 years.   The only expense paid out was the initial commission when the stocks were bought.  This is $8.95 per stock and the portfolio holds 52 stocks.  Another portfolio, the 2012 group, has 48 stocks and similarly the only expense was the $8.95 commission paid to buy each stock.  The 2012 portfolio is 4.25 years old.  2013 holds 20 stocks with a holding period of 3.25 years. In 2014 the portfolio bought 17 stocks and it is 2.25 years old.  2015 bought 18 stocks and is 1.25 years old.

I did not sell or buy any holdings.  Some stocks merged or had spin offs or were bought out.  Any cash proceeds are sitting there. The cash has to hold back returns but in order to keep the data pure, I did not make any active adjustments to the portfolio holdings.

You can review the individual holdings by clicking on the "Model Portfolios" page and selecting an individual portfolio from the drop down menu.

The point of this post is to see if Jason is correct.  Is expecting an average annual return of 8.5% after inflation unrealistic?

I am using inflation of 2% per year.  The results are summarized in the table below.



Passive investing options for ordinary dividend investors include buying ETF's that concentrate their holdings on dividend and dividend growth stocks.  I chose the two ETF's known as SDY or the Spyder ETF that concentrates on solid dividend stocks and VIG the Vanguard ETF that concentrates on stocks that grow their dividends.  The table below illustrates how the same amount of money I invested in my hand picked stocks  performed had it been invested in the shares of SDY and VIG.

My worst portfolio is 2014 even that one returned just over 8.5%.   In the two ETF portfolios the VIG 2014 and 2015 portfolios beat the 8.5% threshold but barely.  All other years easily exceed the 8.5% threshold.

In the words of Frank Wilczek (another WSJ contributing author) in his article "The Ancient Question of Time", measurement is a disruptive process.  I like that thought which is why I measure my work.

Fear not the process of investing your own money in dividend stocks.  I used just 4 very simple  metrics to pick the stocks in these portfolios.  Some argue for more sophisticated measures and by all means add those to the metrics you use.  However, measuring the result achieved in these portfolios allows me to report that a disciplined, simple approach supports the right to expect miracles or more than an 8.5% adjusted annual return.

M* MoneyMadam