What was my portfolio’s return in 2021?
How did each security in the portfolio perform?
What was the contribution of each of these securities to the portfolio’s return, taking into account its relative weight?
Who were the winners and losers of the portfolio in 2021?
How does the performance of the portfolio compare to that of the markets as a whole?
In 2021, the S&P/TSX Total (includes dividends) returned 25.1%, while the US S&P 500 returned 28.7% (27.6% when converted to Canadian dollars).
I will tell you that, in my opinion, few active investors have come close to the returns of North American stock indices in 2021. Indeed, I believe that there would have been two ways of obtaining returns equivalent to these: either by taking a lot of risk with speculative securities or by having invested significant proportions of one’s portfolio in the few securities which dominate the S&P 500, and which have done very well in 2021 (the cumulative weight of these securities was close to 27% of the US S&P 500 Index).
Here are the returns for these stocks in 2021:
Apple: 34.6%
Microsoft: 52.5%
Amazon: 2.4%
Meta Platforms (Facebook): 23.1%
Alphabet: 65.3%
Tesla: 49.8%
Nvidia: 125.5%
Average: 50.5%
In fact, it is interesting to note that the performance of the US Russell 2000 Index, made up of smaller companies, was 14.8% (13.8% when converted to Canadian dollars) in 2021.
What conclusions can be drawn from this exercise?
What mistakes have we made in the past year?
Perhaps more importantly, what are the prospects for the next year?
Which securities of the portfolio are expensive? Which are inexpensive? Where are the biggest risks lurking? What to do with those that appear to be overvalued? Sell them, reduce their weight, or keep them?
For our part, considering our current valuation of each of our securities, we estimate that the entire portfolio is undervalued by almost 9%.
What adjustments could be made to the portfolio to both reduce risk and increase its potential return?
While performing this exercise, it is good to remember the phenomenon of mean reversion. Thus, it is quite possible that the losers of 2021 are the winners of 2022 and vice versa.
I like to think that stocks that have underperformed in one year are kind of ammunition for returns for the next year. Unless, of course, these stocks have gone down for good reasons and our initial investment needs to be called into question. When we realize that all our stocks have done very well over the course of a year, it is likely that the return obtained has reached its maximum – the stars were all aligned. In these situations, it makes sense to expect lower returns for the next year. Is this the case with your portfolio?
All these questions aim to take stock and be as objective as possible regarding the returns obtained and the prospects. They also allow you to measure the risks and potential of your portfolio and make adjustments, if necessary.
In my opinion, it is best not to make drastic changes to your portfolio, but rather to act gradually and after taking the time to think it over.
