ITA Wealth Management

Gaining access to small investor portfolio information is difficult, making it almost impossible to compare how well stock pickers perform vs. index or passive investors.  Investors don’t like researchers poking around in their broker accounts and one can understand why.  There are a few studies on the performance of the small investor, but they are dated.  Here is current information that makes a strong case for asset allocation and passive investing, our philosophy on this blog.

On the Internet there is a site that tracks over 7,000 investment clubs.  These clubs are made up of individuals that pick stocks to populate their portfolios.  Right now their top picks are: GE, JNJ, MSFT, WAG, SYK, CSCO, HD, PG, SBUX, and AFL.  These are excellent companies and I’ve held shares in most of them over the last ten years.  The average portfolio for these clubs is a little over $61,000 so they are sufficiently large to be well diversified.  The data goes back to 12/31/2000 or just one month different from my passive portfolio data.  Here are the results.

The Internal Rate of Return (IRR), for what is known as a Club Index, is negative 4.0% (-4.0%) while the IRR for the VTSMX benchmark is 2.9%.  The passive portfolio (PP) that began on 12/01/2000 or 30 days earlier than the Club Index has an IRR of 5.4% compared to the VTSMX index of 2.8%.  The 0.1% difference in the benchmark is due to the slight difference in the starting dates and the cash flow that occurred in the PP.

The 9.4% (5.4% vs. -4.0%) difference between stock picking and index or passive investing is startling.  The Passive Portfolio (PP) is constructed of ETFs.  We used iShare ETFs to build this portfolio since Vanguard did not have ETFs at the time this portfolio was launched.

If anyone has any questions related to the makeup of the PP, just ask.  Once the August broker statement is available, I will post additional information on the Passive Portfolio over on the Premium Content side of the blog.  One amazing bit of information on the PP is its low risk.  As a result, the Information Ratio (IR) is quite high for this portfolio. I consider the IR value to be the “gold standard” measurement for any portfolio as it takes into account both return and risk.

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Photograph:  Preparation for national holiday in Tiananmen Square, Beijing, China