Comparing the portfolio performance to S&P 500 index
Before going into further detail, let’s compare the performance of my portfolio to S&P 500 index.
Imagine that one dollar was invested on the day the trading commenced. The value of the resulting portfolio is shown by the dark blue line. This line is built without any assumptions; it is merely a rescaled chart of the actual dollar value of the account. Positions were marked at mid-market to arrive at this value.
As the trading of futures is not done according to any model, it makes sense to isolate its effect and consider the portfolio value net of the contribution of trades in futures. The value of the one dollar under this assumption is shown by the purple line. The series, plotted by this line, is a series of mark-to-market values of a portfolio that includes trades in stocks, stock options, interest amounts, stock splits and dividend payments. The mark-to-market calculation is done using the daily closing prices I maintain in a database.
Lastly, the yellow line represents the value of one dollar invested in S&P 500 index. As this index is not adjusted for dividends, I make an assumption about the annual dividend yield. Prof.
Aswath Damodaran of NYU gives an estimate of 1.79% annual yield. Accordingly, each daily return of the series of index returns, used to build the yellow line, is incremented by 1.79%/250, assuming 250 business days per year.
At the start of the chart, and throughout much of 2003, the dark blue and purple lines follow each other closely. The reason is that at that time, futures were not traded. At that time, relatively simple pricing models were used, as well as very simple ways to select new trades. The next phase, in 2004, was characterized by a lot of noise, as large market moves exposed the simplicity of the models being used, necessitating further development. In 2005, the whole portfolio experienced a lot of P&L noise, first mainly positive, then mainly negative. This was driven by large directional moves of futures prices and somewhat large position sizes. As new rules for the selection of trading strategies have been instituted around March 2006, the subsequent evolution of the stocks-and-options portfolio (the purple line) has become more orderly. The program used to select new trading ideas has not been showing too many of them lately, causing the relatively flat part in the purple line at the end of the chart (that is, in recent months).
A future post will show various statistical measures of the series of returns on my portfolio, and will also compare them to the same measures for S&P 500.