Dear Fools,I would love to leverage what you guys have done in monitoring the performance of your investments. Could you please share what you monitor and how (preferably in excel)?In excel I already track a lot, but do not have an overview yet what my performance is per month/year. Lowhat.
Lowhat,I rarely worry about per/month or per/quarter. They are things I keep an eye on but don't lose much sleep over those shifts. Per year is dependent on economic/market conditions, freaking out because revenue dropped 07 - 08 is pointless because it is a no-duh moment. I try to discover honest trends which are interrupted every time we have a market event. The honest trends that matter to me vary from firm to firm and industry to industry. jack
I calculate my returns monthly. When you calculate returns you have the option to pick pretty much whatever frequency sample rate you want. You could do it daily, weekly, monthly, quarterly, annually, etc. I find that monthly gives me enough granularity without driving me nuts with the bookkeeping that daily updating would. I then use these monthly returns to calculate my annual total return.Calculating my returns monthly gives me enough granularity to take into account any new money I'm adding into my portfolio and any money I might withdraw from my portfolio. It's important not to include new money added or money taken out in your portfolio returns or you won't be able to fairly compare your stock picking performance to the S&P 500 index or whatever other benchmark you are using. The method I describe here is the method used by mutual funds to calculate their returns, as they also do not want to be penalized or rewarded for client cash flows that are not in their control. This method is called the time-weighted rate of return, or TWRR for short. Here's how it works:Each month I record my portfolio's balance at the beginning of the month and then at the end of the month. To get the return for the month I perform this calculation:( (end of month value - net new cash added) - beginning of month value)/beginning of month value = return for the monthFor example, If my starting balance for the month was $10,000, I added $2,000 at the beginning of the month from my paycheck, and the end of the month balance was $15,000, my portfolio return was not ($15,000-$10,000)/$10,000 = 50%. Instead, it is ($13,000-$10,000)/$12,000 = 25%.Likewise, if my starting balance for the month was $10,000, I withdrew $2,000 at the beginning of the month from my account, and the end of the month balance was $9,000, my portfolio return was not ($9,000-$10,000)/$10,000 = -10%. Instead, it is ($11,000-$10,000)/$8,000 = 12.5%.I then multiply all of the months' returns together to get my annual total return. So if for month 1 I got a 20% return, month 2 I got a 5% return, and month 3 I got a -10% return, my three month return would look like this:[1.2 * 1.05 * (1 - 0.1)] - 1 = 13.4% rate of returnRemember that when you are multiplying returns together you do not use negative numbers. Instead you subtract the negative return from 1 and use the result. Granted, you can get a more and more accurate total return the more samples you take, especially if you are putting in money or are taking out money very frequently. If you are adding money twice a month maybe you'd want to calculate your returns weekly, or maybe the extra accuracy isn't worth the hassle. You could even calculate your returns daily. At this point it all depends on how accurate you want to get and how much work you want to do.Here's a link to a Google Doc spreadsheet that does the above calculations monthly:https://spreadsheets.google.com/ccc?key=0AsraH71-cdcTdHU4ZnR...Yellow cells are cells that require input from you and green cells are calculated by the spreadsheet. "BMV" stands for Beginning Market Value and "EMV" Ending Market Value.Mike
Thanks Mike. Will have a go at it.Lowhat.
Hi Mike,the net new cash added is that just cash or new purchased stocks? Example I have a total account value 10.000, I added 1.000 and my invested value is 9.000. What should I use for the return?Lowhat
Hi Mike,the net new cash added is that just cash or new purchased stocks? Example I have a total account value 10.000, I added 1.000 and my invested value is 9.000. What should I use for the return?Lowhat I'm not Mike, but, think I have an answer. It depends on what performance you are trying to measure. If you want the performance of the entire portfolio then it should be included. If you want the performance of just the $9,000 investment then do not include it.Bob
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
Thanks again for your input. Part of the performance will be influenced by the buy/sell costs and the potential dividend. How do you suggest that I incorporate these? Or does that not make sense and overcomplicates the overview?Lowhat.
Thanks again for your input. Part of the performance will be influenced by the buy/sell costs and the potential dividend. How do you suggest that I incorporate these? Or does that not make sense and overcomplicates the overview?If you measure the value of your entire portfolio you are automatically taking commissions and dividends into account. Commissions will be a reduction to the amount of cash you have from period to period, and so will be a net drag on your returns.A dividend payment just transfers value from equity to cash. A dividend isn't an addition to your assets like depositing new money is. Think of it in terms of a small business. If you owned a business that had $100,000 in assets and you paid yourself a $1,000 dividend, your net worth would not now be $101,000. It would still be $100,000, just now you have $99,000 in the business and $1,000 in your bank account. So that said, as long as you're tracking the entire portfolio (equities plus cash), you'll take the dividends into account. The stock price will drop when the stock goes ex-dividend, but your cash account balance will go up. Mike
Mike,so any dividends or costs I should include in the cash flow? This makes a lot of sense.Thanks Mike for your insight, this relly helps me understand and set-up a portfolio performance tool.Lowhat
Tracking the value of the stock, the dividends and the trading costs are all legitimate inputs in tracking a stocks performance. Either you need to use a Quicken/MSMoney like object to track the entire portfolio or the same can be done in Excel/Calc but takes a little more work on our part, the upside is that we can do it our way. So we have an initial cash flow input of -$X and - commission, which is then followed up by +dividends and tracking the cash out value of the stock held. Makes sense? We can track one stock per row in the spreadsheet and then, if we wish, sum all of them for total portfolio return. Simple XIRR formula can be used to discover the internal rate or return. So - $5000 (for stock purchased)- $10 (commission)+ 167 (dividend)+ 167 + 167+ 167+ 167+ $8000 (market value of stock)- 10 commissionRunning those types of inputs through a IRR formula will track that stocks performance. jack
Once you start using it new questions come up ;-) I probably make it far too complicated but I do want to understand it.First Question for Jack:What I understand is that there are two return calculations (did some google search ;-))1. Money weighted return calculation -> the return experienced by the investor.2. Time weighted return calculation -> the return produced by the manager.The IRR is used in the Money weighted calculation. So I think you refer to a different performance measure then Mike or not?Second question to Mike:What how come that in the calculation we are only interested in the addition or subtraction of cash and not the total cash on hand? Does this mean that the calculation assumes that in the next period (month in our case) the cash is invested and that hence the BMV increases?Appreciate your help.Lowhat
In my spreadsheet we don't care what the portfolio is invested in. It could all be in cash, all in equities, all in bonds, or more realistically, be in a combination of assets. We just look at the portfolio value at the beginning of the period and at the end of the period, adjusting any change in the total portfolio value for new assets added in or subtracted out, so that we are only measuring investment \ returns.Although I label it a net addition or subtraction of cash, don't get too tied to the "cash" label. It could be a net addition or subtraction of any asset. Say a relative died and left you 1,000 shares of Exxon-Mobil. You wouldn't say you had a $77,000 gain on investments for that period. Instead you had an influx of new assets. For most people though, especially people still working for a living, they are only adding assets to their portfolio, and that is mostly in the form of a cash deposit from a paycheck, so I labeled it "cash."Mike
Lowhat,If I understand your question to me and I'm not sure I do, for us the small DIY'r investor we are the manager and we are the investor. We input cash, buy assets that hopefully generate positive returns. We are running a business, it may be hobby in size and scope but it is a business. We have a balance sheet of assets and liabilities and equity. We have a statement of income and we have a reconciliation of cash flows. Most of the time we don't actually need all those fancy statements but in essence they exist. There are some goofy numbers used in add campaigns that need to be watched. "Uber-wonderful-small-cap picker fund's manager has beat the Russell 2000 by over an average of 15% over the last 3 years". If total transaction costs and fees eat 5% then the investors average take home is 10%. The real warning is 'average ... over the last 3 years, all it would take in small cap space to do that is one good year as a stock picker and a couple below average years by the index. jack
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