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URL:  http://boards.fool.com/cabob-is-right-as-usual-the-net-new-cash-added-is-28998785.aspx

Subject:  Re: Monitor Investment Performance Date:  1/3/2011  1:38 PM
Author:  TMFSandman Number:  2511 of 2534

CABob is right as usual.

The net new cash added is any new cash you add into the portfolio. So that would be money you add in from paychecks, gifts, etc. and would also include any money you take out, although any money you take out would be a negative number instead of a positive number.

What you would not include in net new cash is any money you make from interest and dividends, since these are returns on your investments.

If you start the period with $9,000, add $1,000 of new cash, and end the period with $10,000, your investment return is 0%. All of the increase is due to the new cash you added in. Give it a try on the spreadsheet.

The important thing is to really know what you're measuring and why you're measuring it. If you have a portfolio of $1 million and you're only adding in $1,000 dollars each month then it won't matter too much if you don't factor in the cash you add to the total returns (although even here you'd be off by 1.2%).

However, if you have a portfolio of $10,000 and you are adding in $1,000 each month, the portfolio will more than double in size even if the stocks you pick go nowhere. The stocks you pick could go down 50% and you could still show a healthy positive percentage return of 70%. So when the amounts being added in (and/or withdrawn) are large numbers with respect to how big your portfolio already is, it's important to take that money into account when calculating your returns. Otherwise you won't be able to fairly compare your returns against your favorite index's or mutual fund's return.

That's not to say that you have to do this, but if you really want to know how you're doing compared to an index, this is the way to do it.


Mike
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