Entries Tagged 'Education' ↓

Benchmarking a portfolio and calculating returns are both contentious issues in reporting the performance of a share portfolio.
The most common method of benchmarking is to compare fund or portfolio returns to an appropriate share index. Fortunately in Australia there are only a few indexes to choose between. The primary Australian ASX Indices http://au.finance.yahoo.com/indices range from the total market All Ordinaries, AORD, down through the S&P ASX 20, 50, 100, 200, 300 to the S&P ASX MidCap 50 and S&P ASX Small Ordinaries.

For a true benchmark of your performance an Accumulation Index is the correct measure. Albeit flattering, using one of the core indexes would be simply deceiving.

If you invest in Australian shares, the most common benchmark in the ASX200 Accumulation or as it is now known the S&P ASX200 Total Return Index. Standard and Poor’s took over management of the ASX indices in 2001. S&P produced and the ASX published the ASX200 Accumulation Index, XJOAI, until publication was discontinued in December 2005.

If you primarily invest in small caps then the S&P ASX Small Ordinaries Total Return Index is the appropriate index to compare your performance with.

Unfortunately since S&P stopped publication of the Accumulation Index there is no easily obtainable free source of historical data. It is possible to obtain daily data from the S&P web site as they explain in their Index FAQ.
“Where can I find Total Return/Accumulation Index on the Web site?
Go to the specific index that you are seeking and click the ‘Data’ tab. To the right-hand side of ‘TR’ and underneath ‘Level’ you will find the total return value for the date shown. To get historical data you just need to change the date, ensuring the correct date format is used. “

I have started extracting the data from the S&P website and will make it available for free. I’ll continue to update this Excel file, which also contains the S&P ASX 200 index. (AXJO)

What should an individual investor actually do?
Benchmarking against an index may be OK for fund managers, but for individual investors it makes little sense. We can’t invest directly in an index, so what there is no point in comparing ourselves to one. Individual investors should compare their portfolio performance to an investable asset which closely mirrors an appropriate index. Yup that right, I’m talking about an index fund or an ETF (Exchange Traded Fund).

Index Funds and ETFs
Two main choices in Australia, though others do exist:
Vanguard Index Australian Shares Fund” charges a management fee of 0.75% p.a. for the first $50,000, then 0.50% p.a. for the next $50,000 and 0.35% p.a. for the balance over $100,000. There is also a spread of .2% on purchase and .1% on withdrawal.

State Street SpidersETFs on the top 50 or
top 200.Management costs are 0.286% and there will be the bid/ask spread.

Index funds and ETFs are the most suitable choice for investors who do not have the time or interest for investing, but desire exposure to a particular asset. I believe Index funds and ETFs are the most suitable investment vehicle for most investors.

After I had written, but prior to posting I noticed the following new blog post on Rational Wealth Beat the Pros by Being a “Know-Nothing Investor”. I encourage you to read the blog article and I agree with every point except “Invest windfalls right away”. I’ll discuss that another day as I also received an email question as to why I had banked the uninvested portion of the Fusion Investing Portfolio instead of investing it in an index fund.

On a final note: I had meant to blog this last Friday, but was unfortunately knocked off my bicycle by a car and spent 22 hours in the Royal Melbourne Hospital with concussion and suspected spinal injury. Fortunately I will be OK with a visit or three to an osteopath, but I am unlikely to be writing consistently this week. The accident certainly made me all the more aware about how precious life is and how important it is not to waste time or opportunities.

Best to all
Dean

The following was first posted by Dean Morel on the Motley Fool Stock Advisor board “Becoming an Investing Master” on 5th Feb 2007.

Buffett said something along the lines of it is better to be roughly right than exactly wrong. The idea behind this is you should be giving yourself large enough margin of safety that it doesn’t matter if your figures or estimates are a bit off.
Bill Mann from the Motley Fool wrote some similar thoughts on How to Be Exactly Wrong.

One way to hone your roughly right skills is to come up with ranges in a matrix style. Whatever metric you like to use simply lay out a matrix with low, med and high figures to get a good range. I’ll show you an example later.

Here is another example of the same concept. In this post by Hewitt Heiserman the author of It’s Earnings That Count shows how he uses the mean earnings estimate as a high estimate and then builds in low and medium estimates to provide a margin of safety.

I cobbled together a spreadsheet based on Hewitt’s thoughts. Paul Szydlowski helped me automate the task of calculating PIV and ER. The spreadsheet is based on Jim Gillies’s DCF Calculator. If anyone wants a copy please feel free to grab a copy of my spreadsheet with Microsoft as an example.
Another example is using p/e ranges and estimates ranges

In this matrix p/e is down the side and earnings estimates along the top. This provides a quick look at possible price ranges. The range may seem crazy, but that was for a high growth company which I thought could stumble. Realistically I was looking at the central figures, i.e. $20.65 to $30.97. If you do this for other companies you may want to use p/e increments of 2. The two decimal places in the prices should not be confused for accuracy, it is simply Excel and I recommend you round numbers when doing exercises like this.

Yahoo provides mean, high and low estimates and the number of analysts.
You also have past history, how has the company performed in relation to estimates in the past. Earnings.com is a good source for past earnings history.

With practice you can start coming up with your own estimates for companies.
This is especially true for companies that you own and get to know well.