Portfolio management is a tactic used by not only those in the financial sector of the business world, but also by individual’s managing their own personal finances. Therefore, it important to develop and implement investment strategies in order to gain the most on a portfolio – be it as a mutual fund manager or an individual planning for retirement. Tools such as Stock-Trak, an online portfolio simulation, allow students to gain hands on experience testing different investment strategies in a risk-free, yet realistic environment. From February 1 to April 30, 2010 I took part in one such simulation by managing an online Stock-Trak portfolio. After being given $1,000,000 with which to invest, all monetary decisions were at my discretion. This paper discusses my portfolio’s performance, the strategies used during the simulation, what I learned in the process, and how I will implement the knowledge gained from the simulation in future investments.
As a result of poor management and not utilizing all the available resources, my overall return was a mere 1.79%. Comparing this to the return on the S&P 500 over the same time period, my portfolio largely underperformed the market. The return of the S&P 500 from February 1 to the end of April was 10.5%, almost 10 times more profitable than my portfolio (APPENDIX A). Additionally, at the conclusion of the simulation, my portfolio’s Sharpe Ratio, which takes into account the performance of a portfolio with consideration to risk, was 2.66%. This figure is just above the average rate (2.58%) of a 5 year US Treasury bond during the month of April (APPENDIX B). As such, the figure is not overly impressive. A high Sharpe Ratio is preferred.
When the assignment was given, the economic state of the economy was at the lowest state it had been to-date for the year 2010. President Obama had just announced that the American deficit would likely hit a record low of $.16 trillion dollars by the year’s end. According to a Wall Street Journal article entitled “U.S. Monthly Budget Deficit Balloons to a Record” by Meena Thiruvengadam and Jeff Bater, February “pushed the country's year-to-date deficit up to a record $651.60 billion.” Most of the deficit was a result of economic stimulants put in place by Obama which he hoped would speed up the recovery of the American economy. The stimulants did help improve, at the very least consumer expectations as during the course of the assignment the S&P 500 steadily rose during the course of the assignment (Appendix A). Also notable during the time of the simulation was the financial crisis in Greece. How these and other events impacted my investment strategies and overall performance are explained in the following section.
At the commencement of the simulation, I decided to use an active strategy by selecting specific investments which I believed would bring immediate value to my portfolio. Specifically, I selected stocks such as GOOG (Google Inc.) and GE (General Electric) as analyst had noted them for being growth stocks. I speculated that the price of the stocks would rise based on personal research and through knowledge acquired by reading analyst reports from financial resource databases including Morningstar, Factivia, and Mergent. For the first three weeks of the simulation I used an active strategy, continually researching stocks and constantly watching the change in price of my investments. However, I decided to change my strategy and implement a more passive approach after the strategy was proving to be unsuccessful. At the time of switching strategies, my return on investment was under 1%.
After switching from an active strategy to a passive one, I used articles in Wall Street Journal and The New York Times as well as resources from databases such as Morningstar. Many of the stocks I selected, including...