A Year-End Assessment of My Stock Portfolio

Ah, fickle fate. The thing I’ve learned over the past year of investing in public is that the answer to the question “Are you a hero or a bum?” depends on when you grade yourself. On any given day, I could be well ahead of or way behind my benchmark, depending on what a company in my portfolio said when it reported earnings or what some outside analyst said about the stock. Or it could depend on whether stocks were soaring or plunging, and much of that depended on what kind of mood investors were in that day. The market’s performance—and that of my portfolio—has convinced me of what I’ve suspected for some time: Mr. Market is bipolar.

Mr. Market has been upbeat of late, and so, not surprisingly, my portfolio has earned good money. Since October 11, 2011 (the date I bought my first stock), the package has gained 12%, including dividends. The U.S. stock market, as measured by my chosen benchmark, Vanguard Total Market Index ETF (symbol VTI), climbed 25% (all returns are through October 4).

Imperfect Bogey

Even though a 12% return is lovely, I would consider trailing the index by 13 percentage points pathetic—if I had been fully invested the entire time. In reality, because I purchased stocks slowly over the course of the year, my portfolio held a large amount of cash paying nothing for much of the time. So, in a period of generally rising share prices, I would be handicapping my results by comparing them with the index’s raw returns.

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So I decided to look at how the Vanguard exchange-traded fund would have fared had I bought it gradually, on the same schedule as my stock purchases. By doing this, I created a benchmark against which I measured my stock-picking skills rather than my success (or lack thereof) as a market timer. Using this approach, my benchmark gained 14%, beating my portfolio by two points.

By far, my best performer was Apple (AAPL). It returned 72% on my initial investment of $9,755. (I’m attempting to buy all holdings in increments that come as close to $10,000 as stock prices allow. The idea is to make it easy to see how each holding has done at a glance by simply comparing how much it’s up or down from the initial $10,000.)

Other noteworthy winners were American Capital (ACAS), KKR Financial (KFN), Seagate Technology (STX) and Target (TGT). KKR returned 33%. In considerably less than a year, American Capital and Seagate each gained 31%, and Target earned 27%. My biggest losers? Schnitzer Steel (SCHN) and Sohu.com, which lost 39% and 25%, respectively.

Of course, any collection of stocks, whether it’s an index or an actively managed portfolio, will have its share of winners and losers. The biggest difference between my stocks and the market is that a greater percentage of my gains comes from dividends. Dividends contributed 2.4 percentage points of my portfolio’s return, or roughly 20% of the total. By contrast, VTI’s dividends contributed 1.1 percentage points of the ETF’s return, or about 8% of the total.

In the July issue, I wrote about the desirability of owning real estate investment trusts. They were the key to the higher yield. Ten percentage points of my KKR return came from reinvested cash dividends. Starwood Property Trust (STWD), purchased in March, has delivered 4% in dividend yield out of the stock’s total return (yield plus appreciation) of 12%. Apollo Commercial Real Estate Finance (ARI), also purchased in March, has paid two dividends, which have produced a 5% yield. Since my purchase, the stock has returned 10%.

Some investors worry that REITs will not be able to sustain their high dividends. I think the right REITs can, and they give my portfolio a cushion that helps it survive Mr. Market’s frequent mood swings.

Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter. Or email her at practicalinvesting@kiplinger.com.