My Investment Return for 2017

Stock markets gave us above-average returns again this year, even measured in Canadian dollars that rose in value relative to U.S. dollars during 2017. My internal rate of return (IRR) that takes into account cash flows was 12.17%.

A big change for me this year is that at mid-year I retired from my job. It was a tough decision to walk away from a comfortable income, but the family portfolio sits at about 35% above what I calculate we’ll need to make it to age 100. This is a pretty healthy margin in case the stock market crashes, perhaps even healthy enough by my wife’s standards.

I don’t know if I’ll stay retired, but I seriously doubt I’ll ever work full-time again. I may do consulting work if the mood strikes and the work is interesting.

With retirement comes some fixed-income investments. I’ve written before about my intention to keep 5 years’ worth of family spending in safe investments. So, my portfolio that used to be 100% stocks now contains cash and GICs. The percentage in cash will grow with my age according to my spreadsheet calculations.

My benchmark changed for this year as well. In addition to fixed allocations to exchange-traded funds VCN, VTI, VBR, and VXUS, my benchmark has an allocation to cash. My benchmark return for 2017 was 10.60%. My actual return was higher primarily because I was slow in selling stocks to create cash. My returns were boosted by the ever-rising stock markets. If stocks had crashed, I could have lost out by not filling my cash allocation immediately.

I have a spreadsheet set up that dictates all my actions with the ETFs in my portfolio. I do this to eliminate making my own foolish choices in the moment. I haven’t yet automated the cash part of my portfolio. This happened to work out well for me this year, but I prefer to automate everything and wait for my spreadsheet to tell me what to do.

Here’s my cumulative real return history (subtracting out inflation) on a log chart:

I had a spectacularly lucky 1999 where I took a wild chance and won. For the next decade I gave away some of these gains, and for the last several years my indexed portfolio’s actual returns haven’t deviated much from my benchmark returns. It’s good to know that the money I had invested in 1994 has grown to the point where it can buy 7 times as many loaves of bread.

Over my investing history, my compound real return (which factors out inflation) has been 8.72% annually. I have outperformed my benchmark by a compound average of 3.02% annually. Both figures are almost certain to drop in the coming years. For planning purposes, I assume that my stocks will average 4% above inflation, and that cash will just match inflation.

It’s inevitable that your portfolio actions won’t exactly match your investment plan, even if you’re an indexer. In part, I do these calculations to see whether the deviations from my plan are costing me money. When you think you’re being clever, it’s important to see if in reality you’re being dumb, unless protecting your ego is more important to you than money.