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Old 10-20-2009, 01:09 PM   #21
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smjsl - you sure are spending a lot of time figuring out how to model this!

But since you are trying to do something that I did, I will tell you what I did and the outcomes.

First of all - I never considered the S&P500 to be my benchmark, because it was very concentrated in large cap growth stocks in the late 90s when I started my portfolio. Plus it was market-cap weighted which I always thought was crazy anyway.

Since I was setting up a portfolio that had a given bond and stock allocation, I picked a well respected balanced fund with similar allocation as my "benchmark".

And the idea was for the same reason you did - if over several years managing my own asset allocation did not outperform the balanced fund, then what is the point of managing my own AA? Why not put in all in the balanced fund?

And to achieve a reasonable comparison, during the 2.5 years I was averaging into my target asset allocation, I put an additional chunk into the balanced fund. It was about 10% of my portfolio.

So that made comparisons relatively easy using the Quicken ROI functions which takes into account additions and withdrawals. For any time period, I could look at the ROI of my portfolio not including the benchmark, and compare it to the ROI for the benchmark fund. Straightforward and accurate comparison.

Now - some interesting stories about using a benchmark:

I started out using WEBAX. During the early 2000s, my AA portfolio did at least as well, but then I became aware of other balanced funds that were doing better - namely DODBX. That became my benchmark for several years outperforming my own AA, and by 2005 I was seriously considering just putting any new money that came my way into it and that is what I started doing.

But low and behold - 2006, 2007 - my more broadly diversified AA portfolio started to outperform DODBX - blowing it away in 2007, and really crushing it in 2008. Yep, new money I had added to DODBX in 2006/2007 was hurt badly whereas my original AA portfolio did way better. Of course the reason is simple - DODBX rode the wave of large cap value doing well much of 2000s, but by late 2000s large cap value did very poorly. My more widely diversified AA portfolio was behind for a while and then it screamed ahead.

So what happens? You guested it! Now I have yet another benchmark! OAKBX! But given the performance of my own AA portfolio over the past 5 years, I have renewed confidence in it and will stick with it. Where any new money goes - I don't really know. But I probably wont have that much new coming in anyway as I no longer have many assets outside of my retirement portfolio.

What is the moral of this story? Even if you pick a benchmark and then decide to abandon your own AA in favor it it, you might still encounter periods where your benchmark underperforms. Past performance does not guarantee future results!

It's a tough call!

But I still think it's useful to have some comparisons - it keeps you honest, it forces to you look at some of the details you might otherwise gloss over.

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Old 10-20-2009, 05:50 PM   #22
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Thank you Audrey.

I think your benchmark picks clearly make more sense than s&p500. It's good to read about your experience and it's true - in the end underperformance in one period does not mean it in the next one (esp. if you learn something in the process).

I still think proper comparison would imply any additions and withdrawals from portfolio had to be added proportionally to your benchmark for proper comparison of your own picks vs what would have happened with benchmark (i.e. $X addition to portfolio must have been done with 10% of X going to your benchmark)... but like I said before, degree to which this matters depends on how large your contributions / withdrawals were relative to portfolio size.

In any case though, your experience gives me something to think about. Thanks!
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Old 10-20-2009, 06:57 PM   #23
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The ROI function takes additions and withdrawals into account over any given time period, to comparing two portfolios works reasonably well.

While I was building the portfolio, I did do the consistent contributions to both portfolio and benchmark - 10% went to the benchmark.

Now, since I am retired, and any contributions/withdrawals are small compared to the size of each portfolio, I don't worry too much about what residual performance gain/loss might be attributed to contributions/withdrawals during any comparison time period.

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