My Investment Return for 2023

My investment return for 2023 was 13.0%, just slightly below my benchmark return of 13.2%.  This small gap was due to a small shift in my asset allocation toward fixed income.  I use a CAPE-based calculation to lower my stock allocation as stocks get expensive.  This slight shift away from stocks caused me to miss out on a slice of the year’s strong stock returns.  Last year, this CAPE-based adjustment saved me 1.3 percentage points, and this year it cost me 0.2 percentage points.

You might ask why I calculate my investment returns and compare them to a benchmark.  The short answer is to check whether I’m doing anything wrong that is costing me money.  Back when I was picking my own stocks, I chose a sensible benchmark in advance, and after a decade this showed me that apart from some wild luck in 1999, the work I did poring over annual reports was a waste.  Index investing is a better plan.

The next question is why I keep calculating my investment returns now that I’m indexing.  I’m still checking whether I’m making mistakes.  As long as my returns are close to my benchmark returns, all is well.  I investigate discrepancies to root out problems.

Some don’t see the point of calculating personal returns.  Perhaps they are very confident that they’re not making mistakes.  In the case of those who pick their own stocks or engage in market timing, I suspect the real reason for not comparing personal returns to a reasonable benchmark is that they don’t want to find out that their efforts are losing them money.  Focusing on successes and forgetting failures is a good way to protect the ego.

I like to focus on real (after inflation) returns.  The following chart shows my cumulative real returns since I took control of my portfolio from financial advisors.

I have beaten my benchmark by an average of 2.35% per year, but this is almost entirely because I took wild chances in 1999 that worked out spectacularly well.  Excluding 1999, my stock-picking efforts cost me money.  It was difficult to accept that I was paying for the privilege of working hard.

So far, my compound average annual real return has been 7.61%.  I don’t expect my future returns to be this high, but the future is unknown.