A while back I posted about the performance of my TSP account, and I planted a mental note in my head to analyze my Roth IRA account in the same way when I got a chance. So I did. I printed out all of my annual statements since 2007, and calculated my annual holding period returns. My holding period returns were calculated as follows: [ending value – (beginning value + contributions)] / (beginning value + contributions). Here are my IRA returns (negative returns in red):

  • 2007: 24.96%
  • 2008: 1.6%
  • 2009: 15.83%
  • 2010: 12.25%
  • 2011: 13.12%
  • 2012: 15.61%
  • 2013: 15.7%
  • 2014: 0.79%

My geometric return (compound annual growth rate) is 11.56%. My risk, measured as the standard deviation of my IRA’s return, is 8.94%. If I assume a 4% risk free rate, my ex-post Sharpe ratio is .8464. I like the consistency of my returns from 2009 through 2013, it almost looks like I know what I am doing until 2014 happens. I need to compare this to the market though. It is important for me to measure my performance against the market for a few reasons.

  1. I actively manage my IRA by selecting individual stocks and/or ETFs and writing covered calls. Would I be better off just investing in an index like Bogle would say? I do have trading costs associated with actively trading my IRA and I need to know if it is worth my effort.
  2. Am I taking on too much risk by actively managing my IRA? Would I be better off in a ETF like SPY, even if my returns are superior to the market?
  3. I am spending nearly every waking moment studying for the CFA Exams or working towards my MSAPM at Creighton, and I want to know if I am just like the majority of active managers who are underperforming the markets. In other words, do I have a future as an active manager?

As I stated before, I like to compare myself to the S&P 500 because I think of it as the market. The S&P 500 returns (including dividends) for the same period are here (negative returns in red):

  • 2007: 5.49%
  • 2008: 37%
  • 2009: 24.46% *
  • 2010: 15.06% *
  • 2011: 2.11%
  • 2012: 16% *
  • 2013: 32.39% *
  • 2014: 13.69% *

* denotes years where the S&P 500 has outperformed my Roth IRA.

The geometric return for the S&P 500 Index is 7.05%. Risk of the index, as measured by standard deviation, is 21.16%. With a 4% risk free rate, the ex-post Sharpe ratio of the S&P is .1439.

So, it looks like I am doing just fine. Despite the fact that I have underperformed the market 5 out of 8 years, I am much more consistent overall and that has made all the difference. My returns look mild and smooth while the market looks like Mr. Toad’s Wild Ride. My overall return is better than the market’s, 11.56% versus 7.05%. My risk is lower than the market’s, 8.94% versus 21.16%, which gives me a Sharpe ratio that is higher than the market’s, .8464 versus .1439.

I answered all of my questions to my satisfaction, and I will keep actively managing my own IRA account. I beat the market and I did it with less risk. Score one for active management.

I am attaching my MS Excel worksheet Portfolio Performance which includes all calculations for my TSP and IRA accounts as well as the S&P 500 Index.