YoPortfolio is on a mission to create the best analysis tool for your personal stock portfolio.
We're proud of the progress we've made so far, which includes...
- Calculating Trade Scores, which summarize the quality of each trade so you can easily identify your most effective (and least effective) trades.
- Displaying a graph that uses a special method to accurately compare your historical performance against the S&P 500.
- Enabling users to temporarily hide a trade to see its true effect.
Although all of these features help identify certain facts about your portfolio, they also have a much larger purpose. All the features in YoPortfolio are designed to help you learn from your own portfolio. I'm not just talking about the statistics and the facts...I'm talking about the valuable lessons and deep insights just sitting there, waiting to be uncovered.
Today I will focus on trade scores and a few of the insights they have shed on my own portfolio. But first, I will give some background on what they measure and how they work. Let's pull back the curtain to reveal what’s behind your Trade Scores.
The Basics of Trade Scores
A Trade Score can range from -5 to +5, with 0 indicating a perfectly neutral trade. Although they are recalculated and kept up-to-date many times each day, each trade score emphasizes the long-term performanceof a trade.
Two qualities are factored into each trade score...
- Company Performance: We're looking for trades that consistently outperform the S&P 500 over long periods of time.
- Personal Impact: The trade must have a significant impact on the overall performance of your portfolio to receive a high trade score.
A couple examples to illustrate how these two qualities influence your trades scores:
- "Buy" example: Let's say you took a small position in Company A, which has drastically outperformed the S&P 500 ever since you purchased the stock. However, due to the small size of that trade, it did not cause your overall portfolio to rise significantly. This would most likely result in a trade score of about 1 or 2.
- "Sell" example: Suppose you sold part of your holding in Company B. Ever since you made that trade, Company B has surprisingly beat the market. If you would have held onto those shares, your portfolio would have risen significantly. Because the sale of those shares turned out to be a poor decision, the score for that trade would likely be -4 or -5.
In general, trade scores are the easiest way to identify the best and worst trades in your portfolio. They may also help you learn that some of your decisions weren't actually as great (or as bad) as you thought they were. Trade scores are a simple tool to help make the granular details of your portfolio a little easier to understand.
As I've used YoPortfolio over the past year, I've learned some surprising and unexpected lessons from my own portfolio's past. Sometimes these lessons affirm my own beliefs by validating expectations. But the most interesting lessons come from the surprises I get when I see a trade score and think, "That trade score can't be right.."
I learn the most from those situations when I question the math behind the trade scores, which prompt me to dig a little deeper into my portfolio by hiding trades and experimenting with the other features in YoPortfolio.
Although I'm sure I will learn plenty of new lessons in the future as the markets change and my portfolio evolves, I'll share just two of the most recent lessons trade scores have taught me from my own investing history.
- The more companies I own, the less impact each company will have on my returns.
This is the double-edged sword of diversification. Of course it's important and responsible to diversify by owning shares of ... let's say ... at least 15 companies. But as I bought shares of more companies, I noticed that more of my trade scores began trending toward 0 (neutral) from both directions. This is because although I was spreading the risk, I was also limiting the potential reward relative to the rest of my portfolio.
I've found there's a certain "sweet spot" of the number of companies I hold. I want to be poised to benefit from the outperforming companies that end up crushing the market, and I want to add to those winners over time. But I also want to be careful not to put too much of my portfolio into any of the companies I fall in love with.
I am reminded that it only takes a few great companies to give a portfolio the boost it needs to beat the market, even if most of the other holdings don't do so well. It's a matter of finding the right number of companies to invest in and allocating a reasonable percentage of your portfolio to each one. The goal is to find the right balance between setting yourself up to benefit from the winners while also trying to hurt less from the losers.
Diversification will look different for everyone based on their own risk tolerance and preferences. Keeping an eye on trade scores can help flag those companies that may have had too much of an impact on your portfolio, one way or the other.
- A great holding doesn't have to consistently outperform the market.
My personal experience with Apple gives some good context to this lesson. For a long time, I enjoyed Apple's seemingly constant outperformance of the market as it rose to obtain the largest market cap of any company in the world. Apple was the shining star in my portfolio - the one company that made up for all the under-performers and still left me with a market-beating portfolio.
Then, things started to slow down for the giant as the smartphone market became saturated and Apple's capability to innovate was questioned for the first time since the loss of Steve Jobs.
For a while, it looked like Apple's outperforming run was over. The stock dropped and many analysts declared they were selling Apple and moving their money elsewhere. From July 2015 to July 2016, the stock fell about 25%.
Since then, as of the time of this writing, the stock has nearly doubled (up about 99% in the two years since July 2016).
Despite that one year of what sounded like "doom and gloom" from the financial media, Apple has proven to be a rewarding stock. I learned it's okay to have one bad year. Overall, Apple stock has gone up about 170% since I first bought it, compared to about 100% for the S&P 500.
I've heard similar, more dramatic, stories involving other companies over different timelines from numerous financial books, blogs, and podcasts, but it was rewarding to uncover this lesson myself in my own portfolio, and validate my decision to hold a company I knew well and accepted the risk of owning. Patience paid off. Today, the trade score of my original Apple trade remains at +5, despite the bad year it endured.
These are just two of the lessons I've learned from the trade scores in my own portfolio. What have you learned from yours? Let me know by sending me an email or using the contact form here. Thanks for reading.
Disclosure: This blog represents my personal opinions. I am not a financial advisor. Do not buy or sell securities based solely on what you read on this website. Seek opinions from a qualified financial professional before making any financial decisions. See the Terms of Service for more details.