Hey guys,
I’m back for another near end-of-year Roth IRA update. Last update, I showed you how my portfolio took a huge dip versus the market and discussed how I thought it was unlikely I would beat the index this year.
In case you need a reminder, here’s a picture of my portfolio’s performance vs. the S&P 500 from my last post in addition to a screenshot from my portfolio today.
There’s a huge divergence over the last month. My Roth IRA’s return has been pretty close throughout most of the year, but over the last five-or-so months my portfolio has been lagging. However, one thing that those of you who have been following my blog closely know is that this graph above me is the return of share price appreciation excluding dividends. I promised a total-return calculation at the end of the year including dividends and I’m going to reveal my portfolio’s total return vs. the market for the first time today!
First, I want to explain how I made this calculation and acknowledge that it isn’t perfect. Dividends come in sporadically throughout the year and M1 Finance re-invests them automatically in the pie that has underperformed the most once you reach $25 in uninvested dividends.
I really like this feature, because it automatically re-balances your portfolio over the year with the portions of it that are the most underweight. However, it makes the overall return calculation tricky because there isn’t really a good way to measure how those dividend returns contributed exactly to the overall return. For example, if my portfolio yielded 3%, and the portfolio I’m comparing mine to yielded 1%, the overall return difference for the year wouldn’t be 2% exactly, because that money was invested into companies whose returns for the year vary. Also, the timing of dividends matter in this scenario and the share price that the purchases were made.
After acknowledging this, the difference in overall return should still match the overall difference in dividend yield pretty closely. I don’t have the proper tooling to compare total return of my portfolio with the market, so I’m working with what I have.
Now, with that out of the way, let’s get into how I calculated overall return.
As of today, my Roth IRA portfolio wields an overall portfolio dividend yield of 2.75%. By comparison, the S&P 500’s dividend yield (tracked using VOO) is 1.25%. I’ve shared pictures illustrating these figures below.
The difference between 2.75 and 1.25 percent 1.5%. So one could reasonably expect my portfolio to contribute an additional one and a half percentage points to overall return with dividends. For the purpose of this exercise, I’m interested to see how this bump in overall expected return affected my portfolio throughout the year.
So, here’s how I’m going to calculate the return. I’m going to take each of these numbers and divide them into an expected annual return in monthly increments. So, I divide each of the annual dividend returns by twelve to see how many percentage points per month they would add to the portfolio’s value on average.
- S&P 500 dividends: 1.25/12 = 0.104% per month
- My portfolio dividends: 2.75/12 = 0.229% per month
To keep a running tally of this total, I’m going to add subsequent months’ expected dividend boost to total earnings together to get a picture of how this looks for the year. For example, in the month of March, I would add 0.312% of return to the S&P 500 portfolio and 0.687% to my portfolio to represent a total of three months of dividends (dividend number x3).
Now, for the first time, let’s take a look at the overall portfolio return vs. market return over the course of the year.
Total share price appreciation
- S&P 500 from January 4th – December 21st: +25.56% ((425.69-339.03) / 339.03) x 100
- My portfolio from January 4th – December 21st: +22.29% ((((55,747.58 – 6,000 – 1,267.16) – 39,641.18) / 39,641.18) x 100)
Total return as of Dec. 21st:
- S&P 500: +26.61%
- My Portfolio: +25.04%
Here’s the graph I made of my portfolio’s total return against the market using the logic I described above.
The blue line is my portfolio. After doing this exercise for the first time, I really wish I would have calculated using total returns sooner. If you take a look at the appreciation-only returns in the top graph, my portfolio has lagged the S&P 500 since around July, but the overall picture was much closer all the way into December. I think this would have given me a bit more motivation to keep writing.
In fact, there is still some time to go until the end of the year. I only need to catch up to the S&P 500 by around 1.6% with about a week and a half of trading days to go to match overall S&P 500 returns for the year. It’s not too probable, but I’ll be keeping an eye out for it.
One thing I’ve noticed with my portfolio is it does tend to mean-revert a bit against the market. I’m hoping that because my stocks did so poorly vs. the market in the prior month, by the end of the month they will average out and get me closer to a similar overall market return.
This took me some time to calculate and share with you guys, so I hope you enjoyed it. I’m planning on doing a big recap of my 2021 Roth IRA portfolio as well as a new post highlighting my 2022 Roth IRA strategy with the holdings I’m choosing for the year.
Stay tuned and happy investing!
Roth and Roll Finance 