Monday, 7 April 2014

The challenge of tracking your portfolio returns

As you can probably guess from this website - I am a person who likes tracking everything.  I track my financial goals, I track my weight, I track my savings, I track my expenses.  It was therefore rather disconcerting when I found myself wanting to write a post on my 2013 share portfolio return and I was unable to dissect what it actually was.

If your portfolio positions are not static your returns are harder to track than you may imagine

If for any reason your portfolio composition changes, tracking your overall portfolio return becomes a real challenge!  You cannot just take the starting value of your portfolio and then the ending value and then work out what your percentage returns are for several reasons

  1. If you have contributed cash into your share account then your returns are going to look a fair bit higher than is really the case
  2. If you have sold shares and withdrawn cash then your returns are going to be depressed
  3. Any dividends that are not re-invested should count towards your returns however are not going to be using this method
  4. Transaction costs should factor into your portfolio returns
All of these challenges are surmountable however if you try and do it in hindsight it is close to impossible.  I tried to do it for 2013 so I could write a post on my 2013 portfolio return and after a day of effort I realised that it was just far too much effort.

If you want to track your portfolio returns therefore, you need to set up a method of doing so at the start of your tracking period which takes into account all of the issues above.

Treat your own portfolio as a fund manager may treat theirs

The best way I found to
track my portfolio is to imagine how a fund manager may treat their portfolio and do it the same way.  All cash flows from investments affect the unit value of the investment and any deposits or withdrawals from the portfolio affect the number of units in the portfolio.

Below I have included a hypothetical as to how this could work

  • Assume I have $100,000 invested at the start of the period
  • At the start of my exercise I create an arbitrary number of units.  For example 100,000 units.
  • Each unit is therefore worth $100,000 / 100,000 units = $1 per unit
  • Assume that a few months into the year my portfolio is now worth $105,000 - i.e. $1.05 per unit and I decide to add another $2000 to my share portfolio - I am therefore buying 1904.7619 more units in the fund
    • The fund is now worth $105,000 + $2,000 = $107,000
    • There are now 100,000 + 1904.7619 = 101,904.7619 units
    • Each unit is worth $107,000 / 101,904.7619 = $1.05
    • Thus the addition of more cash has not affected my portfolio return
  • Dividends do not change the number of units and so you are including the affect of dividends on your portfolio return
  • Withdrawing cash is the same as selling units and thus shouldn't affect the portfolio return either
At the end of the period you are looking at - all you need to compare is the value per unit you have allocated at the end compared to the value at the start and you have your portfolio return over the period.

It is far too hard to re-create this historically (although it is possible if you are really keen).  The best way is to set it up at a point in time (i.e. now) and go from there.  I am setting my portfolio up and in my net worth updates I will include an update on how my share portfolio tracks from month to month.

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