“A Rising Tide Lifts All The Boats”

“A Rising Tide Lifts All The Boats” – With US stock markets smashing one record after the other this saying most certainly applied to a lot of investments this year. Therefore we won’t point out the performance of our portfolio which is about +23.7% in the twelve months ending 31 Dec 2017. We believe that it is more important to highlight how well our portfolio performed compared to relevant benchmarks. But let’s start at the beginning.

We’ve been investing in the US stock market for many years. Results back then were mixed, so we decided to do something about it with the objective to reduce risk and volatility while improving performance. As a first step we sought a set of principles in support of this. The result was a very most substantial change in the structure of our portfolio. Our portfolio now features a majority of value stocks “spiced up” with a small number of high growth companies.

Our aim was to achieve a performance that would be as close to the S&P 500 as possible. We picked the S&P 500 because we believe it is a good representation of the overall US stock market. Also, historic data suggest that the long-term compound annual growth rate is about 8.5%. With +19.42% the S&P 500 had an excellent run in 2017.

As a result this means that for this time frame our portfolio has tracked 4.31% ahead of the S&P 500 at 31 Dec 2017. We do not expect this to be the norm as there is obviously the possibility that we just got lucky with our choice of companies. In other years our selection might have fared worse. The following graph compares the performance of our portfolio compared to the S&P 500 and selected ETFs, indexed with 31 December 2016 being 100%.

Based our research we know that historically the value stocks in our portfolio have performed better than the S&P 500 by about 2 percentage points. Combined with the small number of growth stocks, we believe that our portfolio should be performing at least in line with the S&P 500 in the future as well. Obviously, past returns are not guarantee for future returns.

At the same time we keep the costs low. Firstly we are working with a broker who charges us very low fees. More importantly, we avoid feeds altogether by using a buy-and-hold strategy. We rarely sell shares. The turn-over in the portfolio is low. We believe that frequent selling and selling only enriches the broker. We do not attempt to time the market.

We believe that everybody is entitled to a decent investment result, even though, on average, all market participants as an aggregate will have a result that is identical to the market performance (minus trading costs!). As our portfolio started to match the S&P 500 performance we began considering how we could make our approach available to a wider audience. This blog is the first step towards it. Stay tuned for more to come.

Happy investing!

Note: While the quote “A rising tide lifts all the boats” is frequently attributed to John F. Kennedy, his speech writer Ted Sorensen revealed that he got it from the regional chamber of commerce, the New England Council. Source