7 Tests To Determine How Your Investment Portfolios Have Fared

wall-street-signBefore Wall Street and the media combined to make investors think of calendar quarters as “short-term” and single years as “long-term”, market cycles were used as true tests of investment strategies over the long haul. Bor-ing.

There were four types of standard analysis used by most financial institutions, Peak-to-Peak, and Peak-to-Trough being the most common found in annual reports. There were also basic differences in purpose and perspective in the old days, and a focus on results vs. reasonable expectations for actual portfolios.

Even more boring, and not nearly as profitable for “the wizards” as today’s super Trifecta, instant gratification, speculative, mentality.

Portfolio performance analysis was intended to be a test of management style and overall methodology, not a calendar year horse race with one of the popular averages. The DJIA was (I believe) originally conceived as an economic indicator, not as a market-performance measuring device.

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No real-life, personalized, portfolio should ever be a mirror image of any other, or comparable to any particular market index. Analysis should be of process, content, and operating strategy; the objective should be fine-tuning of either the philosophy or the discipline.

If the portfolio market value, in a Peak-to-Trough scenario, fell by a greater percent than the benchmark(s) being used, the overall approach would be looked at for reasons why. Was there excess speculation? Did interim profits go unrealized? Was an issue or a sector overweighted?

Theoretically, portfolios with 30% or more committed to income securities would fall less in market value than 100% equity portfolios — they would also be expected to rise less than their more speculative brethren in a Peak-to-Peak analysis. Formulating valid expectations are important for long-term investment success, and sanity.

November 1999 to Mid-March 2009 would have been the ideal analytical period for a Peak-to-Trough review of WCM (Working Capital Model) portfolios, but the November to May time period illustrates the cyclical approach to market value performance evaluation just as well— and the data was easier to obtain.

Here are seven tests you can use to determine how your investment portfolios (or your clients’ portfolios) have fared since the stock market peaked toward the end of 1999, using a 60% Equity/40% Income, WCM asset allocation as an expectation producing benchmark.

One: The percent fall in the S & P 500 average was about 33%. Your portfolio market value should be up by around the same number.

Two: “Smart cash” should have been huge toward the end of 1999 and on the rise again through the middle of 2007, reflecting much too high IGVSI stock prices. Then, portfolio smart cash should have been shrinking (while equity prices tanked) to nearly zero until the second quarter of 2009.

Three: Planned disbursements for expenses should have continued unabated throughout the entire ten year period without ever the need to sell any securities, or to reduce payment amounts— except in (client) emergency circumstances.

Four: Portfolio market values should have rebounded to a greater extent (closer to the most recent all time high) than the gain in the S & P average relative to its latest ATH— after both the dotcom bubble debacle and the latest financial meltdown.

Actually, the dotcom fiasco was pretty much of a non-event for WCM portfolios because of disciplined operating rules boiled down to: “no IPOs, no NASDAQ, no Mutual Funds, no problem”. This time around, the “problem” was a stake in the heart of what once were some of the best of the best financial institutions.

Five: Portfolio “working capital” should be higher than it was at its peak in 2007, adjusted for net additions and withdrawals, and possibly about twice the level of May 1999.

Six: Total portfolio “base income” should be slightly higher than it was in mid-2007, again adjusted for net portfolio additions and withdrawals (and drastic asset allocation changes)— but the 2007 base income level would have been significantly above that in 1999.

Seven: Finally, there should not have been any major profits left on the table, on any security, of any kind, in any portfolio throughout the ten-year period.

Here’s to a return to the boring investment portfolio!

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