2006 Year-End Review II: Performance

This is the second part of our 2006 year-end review. In the first part, we looked at what we have done in 2006 in order to grow our nest egg. The main contributer to our net worth is our regular contributions to all accounts. In fact, we totally added about $87,608 new money into our investments, including taxable accounts, 401(k) plans, IRAs, and 519 plans. To get a decent growth, our contribution alone may not be enough. We also need some help from the markets. 2006 has proven to be a good year for investors as the Dow was up more than 16%, the NASDAQ increased 11.48%,  and S&P 500 gained 13.62%. So how those components in our portfolios did in 2006?

Mutual funds

In general, it has been a good year for mutual funds as all the funds I own posted double digits gains. Among the 12 funds hold in taxable account, 8 of them beat their respective bench marks. The top three gainers are: TGLDX (gold), TREMX (international), and TAREX (real estate), while the bottom three are: OAKBX (large blend), BUFSX (small growth), and CSVFX (large blend). 

A notable change in performance in the past year is the lagging of small-cap funds. I own several of them across different accounts (BUFSX, BRSIX, VISVX, FSCRX, FCPVX, RSSGX) and they all underperformed S&P 500 except VISVX. For the year, Russell 2000 index, which tracks small-cap companies with a median market cap of 654 million, had a return of 16.94%, while S&P 600 small-cap index gained 14.29%. Small-cap funds have been outperformed large-caps for several years and, as the economy enters the moderate growth stage, some experts predict it's large-cap's turn. Is it time to make a shift?

IRAs

Unlike funds in our taxable account which are all actively managed, 6 out of 10 funds in our IRA accounts are Vanguard funds. The reason to go with low-cost index funds in the IRA accounts is that we know these funds will be held for long time (though we may make some adjustments) and for long-term, the costs will have much more significant impact on what we will keep than, say, a 5-year period (here's a comparison of my funds with their Vanguard counterparts in fees and performance).

People say when the stocks are good, bonds suffer and vice versa. At least 2006 proved this is true as the two bond funds (VBIIX and VIPSX) in our IRAs barely changed. Of course, we didn't really expect any spectacular returns from bonds and they are more for diversifications. Inflation protected securities (VIPSX) had some good time in early 2000s and have been sluggish in the past two years. In a recent Morningstar article, the author still suggested a place for inflation protected securities in your portfolio to get some protection against inflation.

401(k)s

Since our 401(k)s are managed by Fidelity, we have many Fidelity funds in our portfolios. Due to the limited fund selections, diversification in 401(k) accounts are not as easy and straightforward as in taxable or IRA accounts. As the number shows, most of our funds trailed the bench marks in 2006, though my wife's 401(k) had an annual return of 17.3% last year (some funds are not shown as they don't have a ticker symbol) and mine gained 12.5%.

I haven't done the annual rebalance on 401(k) yet and am planing to complete the task this month.  

Stocks

In the past year, I purchased some new stocks/ETFs as I mentioned in the first part of this review and didn't add any new money to most of my stock holdings (except QQQQ, BAC, PEY, PFM, and PGN). The reasons I make continuous commitments to these stocks are: 1) they are all dividend-pay stocks/ETFs (except QQQQ), and 2) I have very small positions with them (except PEY). Dollar-cost-averaging (DCA) is my way to build the size as I don't pay commissions when buy three of them: QQQQ, BAC, and PGN. 

Looking at the return of LFC in 2006 alone should give anyone a pretty good idea of what's the average return of my stock portfolio (though I don't have that number). 295%, that's right! 295%. When everybody was excited when Google, which returned only about 9% in 2006, surpassed $500 in late November, I was just happy to have LFC. In addition, China related stocks/EFTs continued to deliver superior performance as PGJ increased nearly 50% in the past twelve months (click here for more choices on China). The worst performer in 2006 is, again, Nortel, though the stock has seen some nice bounce since the reverse split on December 1st. 

Of course, since I do DCA for almost all the mutual funds, the real returns I got are different from the above numbers which assume only one investment made on January 1st, 2006. In the last part of this year-end review, I will take a look at how our net worth has changed in 2006 due to both our contributions and returns from the markets. 

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