Copyright 2016 Tom Madell, PhD, Publisher
Sept. 2016. Published Aug 29, 2016: Updated Aug 30

Surprising Facts Revealed By a Portfolio Analyzing Tool

By Tom Madell

It may often be quite helpful to find out how your overall portfolio is actually doing over a given period of time as opposed to merely estimating such a result. While it may not be difficult to see how individual funds themselves have done by looking at sites such as Morningstar or at various other fund performance sources, your portfolio will typically include a number of funds blended together with differing percent allocations. Further, the starting point for your investments may differ from that given elsewhere or even go back longer than performance tables might show.

Why might you profit from knowing this data? Aside from mere curiosity, investors may want to see if their portfolio results are as good as they think they are, or more importantly, how they compare to what they might have earned by merely buying and holding low cost, broad-market index funds. If it turns out that either your entire stock or bond portfolio is not performing as well as these index funds, it would suggest that going forward, perhaps you may want to emphasize your current non-broad-market-index funds less and these index funds more. In such a case, you will need to judge for yourself if that index fund outperformance was large enough and long-standing enough to cause you to re-evaluate your choices.

If, on the other hand, you find that your portfolio is actually doing better than the index funds, this suggests that you should probably stay the course with your current fund choices or selection methods. The same "large enough and long-standing enough" judgment just given should be considered in this case as well to support such a continuation.

Given the usefulness of being able to easily determine such information, I was excited to discover a website, described below, that helps you accomplish this. Additionally, I have uncovered some other useful facts that emerged when I made use of this outstanding free tool. (Note that I have no connection with this site.)

Useful Questions for Fund Investors

Let me pose some practical questions that you can now readily get answers for, answers that may prove quite surprising.

Suppose you had invested some money in just a single mutual fund, the Vanguard 500 Index Fund (VFINX), on Dec. 31, 1999. Guess how well do you think you might have done if you just continued to hold that fund through July 31, 2016?

If you guessed somewhere around 10% per year for the entire 16 1/2 year period, you would be ... well ... way off. OK, how about 7%. Nope. The answer is not higher than 10% either.

Give up? The annualized rate of return was a mere 4.27%, as provided by examining a portfolio consisting of just that single fund on the above mentioned website.

Think you might have done better with the Vanguard Total Stock Market Index Fund (VTSMX)? After all, this fund includes smaller stocks too, not just the large cap stocks in S&P 500 index. Well, yes, but not by much - just a bit better at 4.77% annualized. I'm sure most people would have guessed that stocks would have returned more over this long period.

Ready for another big surprise? How well do you think a "plain vanilla" bond fund would have done over the same period? Better, it turns out, than either of the above. The Vanguard Total Bond Market Index Fund (VBMFX) would have returned 5.31% annualized, once again as can be determined using this website.

A Portfolio Analyzing Tool

So here is the website where you can get that kind of useful information if you are interested in seeing this kind of data yourself. In fact, one can calculate the return of any single mutual fund, ETF, or an entire portfolio of such funds, going all the way back to 1985 using the website

To do this,

  1. Go there and click on "Backtest portfolio".
  2. Fill in the data showing the starting date, ending date, and other requested data.
  3. Then list the specific fund symbol with a percentage at 100% of the portfolio. Or, to get data on a multi-fund portfolio, list each fund symbol and its percent of the entire portfolio, making sure it adds up to 100% at the bottom.

The above results certainly tend to take some of the luster off of stock fund investing, at least as applied to results since the end of 1999. Apparently, even owning these highly favored index funds wasn't a panacea for low returns.

But perhaps these index funds may have at least done better than one would have done by investing in a variety of other funds, especially managed funds. To examine this possibility, I did several additional comparisons, making further use of the above portfolio analyzer.

Suppose one had invested in a portfolio consisting equally of the five managed funds with the most assets (i.e. most popular) at that 2000 start date. These were Fidelity Magellan (FMAGX), Washington Mutual Invs Fd Cl A Shs (AWSHX), American Funds Investment Co of America A (AIVSX), Fidelity Growth and Income (FGRIX), and Fidelity Contra Fund (FCNTX). How would that portfolio have done if held all these years? (Assume, going forward, one did not rebalance to maintain equal percentages in each.)

You might expect according to many experts these days, as well as many investors themselves, that the total return for the five managed funds held long term in a portfolio would have failed to do as well as the above two indexes. After all, so many people now say that you can nearly always expect index funds to do better than managed funds. While two of the five funds did underperform the above indexes, this is not how the overall results for the entire portfolio turned out when analyzed by the above tool.

Instead, this portfolio returned 5.09% annualized, better than both of these two indexes. Even going back to May 1992, or 24 years (as far back as the online tool has data on each of these five funds), the managed funds portfolio as a whole does better than the two indexes, although the margin is small, 9.35% vs. 9.25% for VTSMX and 9.14% for VFINX.

Apparently, then, well-chosen managed funds (in this case, chosen by large numbers of investors) cannot necessarily always be branded as inferior in the battle between them and index funds when viewed over the long term.

While the five funds I included in the above portfolio were assembled merely as an artificial example and only in hindsight from a table appearing in a back issue of the Jan. 2000 Wall Street Journal, (i.e. not representing anyone's actual predetermined recommendations but just the most popular funds), what might the tool reveal about an actual portfolio I recommended and published all the way back in Jan. 2000? This portfolio can now be analyzed to see how well it did vs. these indexes.

You might guess once again that the indexes would have turned out to be a better place to be than my portfolio that included both managed funds and some index funds away from the above broad-market indexes. But, if you guessed that, you might again be in for a surprise.

For perspective, the latter stock fund portfolio was actually the first of 16 1/2 years of quarterly portfolios I myself constructed and published on my website. (To see the specific funds included, click here and drop down to the heading "My Model Portfolio".) The portfolio contained six different Vanguard index funds along with eight managed funds, as I assumed that neither index nor managed funds should be ruled out when selecting funds.

When one backtests the 14 stock fund portfolio using the portfolio analyzer, following the percent allocations for each fund I provided back in Jan. 2000, the total annualized return proved to be ahead of all of the above three index funds, coming in at 5.50%, and notably ahead of the two stock index returns, (4.27% and 4.77%).

Of further interest is that my above 14 funds included a 38% allocation to international stocks. Such stocks have done considerably more poorly than domestic (U.S.) stocks since 1999. If one compared my Jan. 2000 portfolio to a two index-only portfolio consisting of 38% international stocks as represented by Vanguard Total International Stock Index Fund (VGTSX) and 62% domestic stocks as represented by Vanguard Total Stock Market Index Fund, the resulting broad-market index portfolio would have returned a mere 4.08%. This two fund portfolio could be considered as having a similar risk profile to my larger fund portfolio, at least in terms of international stock exposure.

Seemingly Small Outperformances Can Make a Huge Difference

The difference per year between the returns of the two portfolios of 1.42% (i.e. 5.50% vs. 4.08%) is not trivial. In fact, assuming a compounded return of 4.08% on $50,000 after 16 years would have grown $45,000 producing an ending balance of approximately $95,000; a compounded return of 5.50% would have grown $67,500, produced an ending balance of approximately $117,500, or a $22,500 difference. In other words, with a starting portfolio of $50,000, one holding the 14 fund well-diversified fund portfolio would have earned 45% more return, that is 135% (67,500/50,000) vs. 90% (45,000/50,000). (See for a calculator than can be used to make these kind of comparisons.)

Note that in Jan. 2000, I did not recommend that one hold this 14 stock portfolio indefinitely. The example is merely intended to be illustrative of the fact that well-chosen funds can indeed show better results on a buy and hold basis than merely just buying and holding broad-market index funds. Significantly though, many, although not all, of the funds in this 2000 portfolio I either still recommend today or have recommended in the not too distant past.

I have already mentioned that the annualized return for the Vanguard Total Bond Market Index Fund for the identical 16 1/2 year period was 5.31%. Looking at the five most popular managed bond funds back at the start of 2000 and assembling them into an equally weighted bond portfolio might once again be expected to have done more poorly than the single broad bond index fund alone.

This time the expectation proved correct, but barely so. The five fund portfolio is shown by the tool to trail the index by a mere 0.22%, at 5.09%. Finally, then, a "win" for an unmanaged index fund over an "after the fact" group of funds that were merely selected from a list of the most popular managed bond funds back in Jan. 2000.

But again referring to my own five "model portfolio" bond funds actually recommended back on the same date (see the above link to my 2000 article for names of the specfic funds), when weighted as I suggested then, this portfolio handily beat VBMFX by 1.47%, returning 6.78%. While, once more, I never recommended these exact five funds be held continuously nor in the 2000 recommended proportions, several of these funds are still within my current bond fund model portfolio all these years later.

Key Findings

Analyzing an actual or hypothetical stock or bond portfolio can be not only useful and informative about one's own fund choices, but reveal aspects in general about investing that don't usually come to light. Using such a portfolio analyzing tool, as described above, has helped to demonstrate two facts:

Broad Index Funds Are Not Always Superior

When considering how to invest over the long term, merely investing in one or two of the broadest of market indexes and expecting to earn the best possible returns would seem not always to turn out that way. Why not? While "total market" index funds can be very effective, many investors may have been persuaded into thinking that such indexes will nearly always be better than utilizing the knowledge of a highly skilled and experienced fund manager, or in researching sub-areas with the overall stock and bond markets that can outperform for over very long stretches.

In arriving at a decision, investors should carefully weigh

    -the known pros and cons rather than accepting the possible doubts cast by the current near-faddish bevy of financial "gurus" that such index funds should be the sole focus of one's portfolio.
    -if they have the analytic skills, confidence, and importantly, the interest, in selecting a more mixed portfolio of funds.

The data presented in this article may serve as a small counterbalance to the myriad of articles and opinions arguing otherwise.

Bond Funds Are Not Always Inferior to Stock Funds

Finally, here is another thing that we can take away from the data provided by such a portfolio analyzing tool. Although often disparaged by many investors, bond funds, and now bond ETFs, should not be viewed as just for relatively conservative investors. While such funds are not likely to outperform stock funds and stock ETFs over extremely long investment horizons, as are available to younger investors, bonds can at times provide as good or better returns than stocks over surprisingly long periods.


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