The end of 2021 marks the completion of the first year in the FiveTwenty portfolio experiment. Therefore, it is time to look back at how the portfolio has performed compared to our benchmark and reflect on what we have learned along the way.
By the numbers
As outlined in the strategy description, we benchmark the performance of the FiveTwenty portfolio against the Easy-peasy portfolio, a portfolio fully invested in VT. The first dimension we look at is the total value of the portfolio. The FiveTwenty portfolio started out the year strong outperforming the Easy-peasy portfolio for the first 6 months of the year. However, in the second half of the year the FiveTwenty portfolio underperformed the benchmark. It ended the year with a 2% lower total value compared to the benchmark. Overall, as of the end of 2021 the portfolio had a gain of 3.8%. 14 positions had a value gain. 11 positions had a value loss.
In terms of dividend payouts, the FiveTwenty portfolio outpaced the Easy-peasy benchmark in every quarter this year. Furthermore, it has also outpaced the quarterly dividend milestones outlined in the strategy description. For the year the portfolio collected $2,110.81 in dividends compared to $1,380.96 for the benchmark and $1,824 estimated. In addition, the portfolio ended of the year with a TTM yield on current value 3.48%. The TTM yield on cost was 3.61%.
Comparing companies from different sector/industry is impractical. At the start of the experiment, we defined the selection criteria for the FiveTwenty portfolio thinking that it will provide a quick and easy means to filter and rank the list of candidates. The criteria have been useful as a filter. However, as a ranking mechanism we have found it impractical. Each sector/industry has its own business models, profit margins and growth trends. Therefore, it was more useful to evaluate a company against other companies in the same sector and against its own historical performance. When deciding among companies in different sectors, the sector’s weight in the portfolio was often the deciding factor.
Evaluating earnings is tricky. When trying to determine the long-term viability of a company, we look at the earnings trend over the last decade. However, GAAP earnings are littered with non-cash and one-time expenses. This makes long term trend analysis impossible. Additionally, when it comes to earnings (net earnings and EPS) every segment/industry has its own idiosyncrasies. For example, utilities have large non-cash depreciation expenses, health care companies incur non-cash expenses related to contingent considerations, and financial companies see large impact to their earnings from unrealized gains and losses from their held-for-trading security investments. Therefore, when looking at a company’s last 10 years of earnings we use adjusted net earnings and adjusted EPS.
Free investment tools are inadequate. The investment tools available to retail investors through brokerage accounts or free websites are very limited. When evaluating the companies, we added to the FiveTwenty portfolio we have employed multiple websites to access the necessary data. Obtaining historical data older than 10 years is pretty much impossible without paying for access. Even obtaining data as far back as 10 years has been a challenge.
Thorough investment analysis is a full-time job. Carefully analyzing the financial performance, business model and future prospects of a company requires a time investment in the 10s of hours. Furthermore, once the initial analysis is complete additional time investment is needed to keep up with new developments. In order to pick our weekly investment for the FiveTwenty portfolio, there was a lot of guessing and following hunches to narrow down the list of dividend companies to 1-2 candidates to perform deeper analysis on. In addition, because of the inability to closely track all companies in our crosshairs on a weekly basis, we have also missed a number of opportunities to add to existing positions at favorable valuations.
Low-cost index funds/ETFs provide easy and cheap diversification. For the second year of the experiment we will add a high yield dividend ETF to the investment options. The fund will provide a backstop option for the weeks we do not have a good individual company candidate.