March 14, 2009

Updown performance 12 months total -33%

I've been playing on UpDown now for nearly 12 months now. I first started in March 21 of 2008. As of March 11th my total return for nearly 12 months is -33%.

Losing 1/3 of my money doesn't sound like very good performance but keep in mind that the stock markets as a whole are down significantly for the past 12 months. By comparison the S&P 500 is down -45%. The Dow lost -44% and the NASDAQ lost -39%. The Wilshire 5000 is off -44%. I'm doing better than the major indexes by 6-12%.

How am I doing compared to actively managed mutual funds?

It only makes sense to compare apples to apples so I'm going to compare to funds that invest primarily in equities in the US. My Updown portfolio is in US stocks.

Using the custom mutual fund screen on CNBC, I search with the settings: Asset class = Equities, Less than 10% foreign, Less than 1% front or back end load and less than 1% management fees.

Since I had -33% return I'll see how many funds did better and worse than me. The results for the screen are:

Greater than -33% return = 171 funds
Less than -33% return = 1191 funds

So for the funds that invest in US Equities, my performance of -33% beat 87.5% of the actively managed funds with comparable asset US Equity class and low or no commissions.

I specifically only looked at US Equity funds to get an apples to apples comparison. It doesn't make sense to compare my performance to fixed income or emerging market stocks. But just for reference sake I can do that too. If you look at ALL equity funds then 842 funds had performance of greater than -33% and 10,112 funds were worse than -33%. Out of all equity funds only 8% beat my performance. But this is including many foreign emerging market funds with higher risks and rewards. If you look at all funds including fixed income, blend and equity then 6,600 beat my -33% and 11,614 were worse. So for all funds in any asset class I beat 64% of them. However this compares my performance buying stocks to the performance of fixed income funds.

My fees were relatively small. Basically when you're managing your own portfolio your fees are what you pay to buy/sell stock and anything else that you pay in fees to the broker. I've made about 60 trades in the past year and Updown charges $100 per trade. SO thats a cost of $6000 for the $1,000,000. That is a 0.6% expense ratio. Now the $100 per trade cost and the $1M assets are fictional and not really something I'd compare to real life. If I was investing a much lower amount of money then 60 trades would be too much because the fees would pile up to be a high % of the assets.. But lets say I had $100k to invest and I used Scottrade to do it where trades are $7 each. That would be 60 trades x $7 for a cost of $420. That would equal 0.4% of $100k assets which is more realistic I'd say. Realistically my expected fee expense rate for self managed portfolio of individual stocks is below 1%. This holds true as long as the assets are large enough. If you only have a few thousand in your account then you don't want to be making 60 trades a year. If I had $10,000 in my IRA and made 60 trades with Scottrade then that would give me a 4.2% fee ratio.

What does all this mean?

To be honest you can't take a lot away from this.

My playing with stocks on UpDown only represents 12 months of performance. Thats not really much of a track history. What if I just got lucky this past 12 months with a few trades? What if one of the major holdings in my account goes bankrupt tomorrow? Maybe I'm just doing better right now cause I have more conservative style and if we return to a bull market my performance will be less than most funds. To have a good idea of how well I could do I'd have to have a long term established track history of several years. If I can beat the funds and indexes by 10% or more for several years in a row then that will start to mean something.

Another thing to keep in mind is that UpDown is simply a game. I know for a fact that I will play a game a lot differently than I would spend my own money. If I were investing $1,000,000 of my own money I would most likely be a lot more conservative with the investments.

To sum up, I think a years worth of performance on UpDown has shown that I'm OK at stock picking so far. But to get anything meaningful out of this game I'll have to play it for several years.

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