In my Equity Analysis class at Creighton’s MSAPM program, we are learning yet again how active management fails to outperform the market. Here is a nice article if you need to get up to speed on the subject. If you prefer the short version it is this, active investing not only underperforms but it costs more money for the privilege of underperformance. This doesn’t bode well for yours truly since I would one day like to actively manage investments.

So, I decided to look at my own performance and see how I have been doing. I am only looking at my Thrift Savings Plan (TSP) here, but I thought it would be a good place to start to check the “active” management of my own account. If you don’t know much about the TSP, you can read about it on my post here or you can look at their website. Here are my returns (negative returns in red):

  • 2007: 7.48%
  • 2008: 14.66%
  • 2009: 40.59% (more of these please!)
  • 2010: 18.4%
  • 2011: 1.81%
  • 2012: 13.43%
  • 2013: 25.46%
  • 2014: 7.34%

My geometric return has been 11.42% per year. If I started with $100 dollars in 2007, I would have $237.45, at the end of 2014. These numbers look decent (except for 2008, and 2011 was a bit weak), but I need to compare them to something. Did I beat the market, or am I just like the other active managers out there? I have always compared myself to the S&P 500, because quite frankly I have always considered it the “market” or the benchmark to beat. The S&P 500 is closely replicated by the C Fund of the TSP. The returns for the C Fund over the same period have been (negative returns in red):

  • 2007: 5.54%
  • 2008: 36.99%
  • 2009: 26.68%
  • 2010: 15.06%
  • 2011: 2.11%
  • 2012: 16.07%
  • 2013: 32.45%
  • 2014: 13.78%

The geometric return of the C Fund’s performance has been 7.1%. If I started with $100 in 2007 and left it only in the C Fund, I would have $173.13, at the end of 2014. So overall, I have beat the “market”. However, a funny thing has started to happen over the last few years. From 2012 and on, I have begun to noticeably underperform the market. In fact, my underperformance appears to be growing. What is happening here?

My guess is that as I have become more educated, I have become more risk adverse and my performance has suffered because of it.  I started regularly mixing bonds into my portfolio in 2012 and have been increasing the G and F Fund (Government and Corporate Bonds) weightings ever since. What I need to do is look at my risk adjusted returns to properly measure my performance. Unfortunately, calculating risk adjusted returns is beyond the scope of this blog post for now (I sense a follow up post in the future) as I am short on time. If I am going to keep mixing bonds into my portfolio, perhaps the S&P 500 is not the benchmark I should be measuring myself against. Maybe the L2030 or L2040 Funds would be more appropriate.

Hopefully, my I-am-risk-adverse hypothesis is correct and this is not a case of the more I learn, the less I earn.