Calculating Returns

[Klogg]

I've been sifting through some forum posts, but none address this problem directly, so I thought I'd try my luck at posting.

Basically my situation is as follows. I'm attempting to calculate my returns on the year, where part way through the year, more funds have become available. For example (figures are fictitious):

Starting funds (July 1st): $100k
Extra funds (Oct 1st): $20k
Extra funds (Mar 1st): $20k
Final value of portfolio (incl. cash): $180k

Given the 20k in October and March weren't available for the full year, how do you actually calculate the return on that? My thought was to scale it for the period of time the funds were available in comparison to the full year... but that doesn't really work out either.

How would you calculate it?

Thanks in advance for the help.

 

[Ves]

I've been sifting through some forum posts, but none address this problem directly, so I thought I'd try my luck at posting.

Basically my situation is as follows. I'm attempting to calculate my returns on the year, where part way through the year, more funds have become available. For example (figures are fictitious):

Starting funds (July 1st): $100k
Extra funds (Oct 1st): $20k
Extra funds (Mar 1st): $20k
Final value of portfolio (incl. cash): $180k

Given the 20k in October and March weren't available for the full year, how do you actually calculate the return on that? My thought was to scale it for the period of time the funds were available in comparison to the full year... but that doesn't really work out either.

How would you calculate it?

Thanks in advance for the help.

Hey Klogg

I calculate my returns as if I'm running a managed fund for myself (thanks to McLovin for the idea).

Basically the unit price is $1 (or whatever nominal figure you want it to be) on 1 July. So if you start with $100,000 you pretend you purchased 100,000 units for the sake of this exercise.

On 1 October you calculate the market value of all of your investments before taking into the account the new purchase. Say they are worth $120,000 now. Your unit price is $120,000 / 100,000 = $1.20.

So when you put in another $20,000 you are effectively purchasing 16666.67 new units.

Rinse and repeat every time you add new capital to the broking account. Cash from say dividends is included in the market price. I don't include any cash generated by dividends as purchases of units if it is reinvested. Any cash you withdraw from the broking bank account counts as a sale of units based on the current market price.

Of all the ways I have tried of calculating real rates of return this is by far the most accurate if you are constantly adding new capital (I personally do it as much as monthly).

Don't forget to include any capital gains tax on realised gains and tax on dividends in your calculations!

 

[skc]

Starting funds (July 1st): $100k
Extra funds (Oct 1st): $20k
Extra funds (Mar 1st): $20k
Final value of portfolio (incl. cash): $180k

Given the 20k in October and March weren't available for the full year, how do you actually calculate the return on that? My thought was to scale it for the period of time the funds were available in comparison to the full year... but that doesn't really work out either.

How would you calculate it?

Thanks in advance for the help.

There isn't actually a single correct way...Here are 2 possible methods:

1. The weighted value of funds = ($100k x 12months + $20k x 9months + $20k x 4months)/12 = $121.67k. So return = $180k / $121.67k -1 = 48%.

2. Calculate % return on the day before additional funds are put in, then add the additional capital to calculate the enlarged capital base. Say the portfolio balance was $110k on 30 Sept and $150k on 28 Feb.

Period 1 (1 July to 30 Sept), capital base = $100k, return = $10k. Return% = $10k/$100k = +10%.
Perido 2 (1 Oct to 28 Feb), capital base = $120k. Return = $20k. Return% = $20k/$120k = +16.67%.
Period 3 (1 Mar to 30 Jun), capital base = $140k. Return = $10k. Return% = $10k/$140k = +7.14%.

Total return for the year = 33.81%.

I quite like the managed fund approach by Ves as well and I think it gives the same answer as above.

 

[Klogg]

Oh wow, that concept really should have been obvious to me... Can't believe I didn't think of it.
Thanks to both of you for the idea

I add capital at least quarterly, so this helps.

Now to find the closing price for the relevant companies and put it all together... something to do over the weekend I guess.

Thanks again!

 

[Ves]

Now to find the closing price for the relevant companies and put it all together... something to do over the weekend I guess.

Thanks again!

No problems, happy to help. I recommend using Yahoo finance for the closing prices. They have an extensive price history for all listed shares. And once you set up the dates all you need to do is search each code. I remember that Google finance used to reset the dates with each code search....

 

[waimate01]

Starting funds (July 1st): $100k
Extra funds (Oct 1st): $20k
Extra funds (Mar 1st): $20k
Final value of portfolio (incl. cash): $180k

How would you calculate it?

XIRR function is your friend.

Consider an Excel spreadsheet with the following columns:

A - Date
B - Purchase cost of new tranche of shares, including brokerage
C - Amount of cash dividend received (do not include DRP)
D - Proceeds received from sale of a tranche of shares
E - Current Value (show only the final current value, not the current value each step of the way)

Create a new column F = C + D + E - B

At the top insert an XIRR function which ranges over A and F. Presto. If you want returns before tax, also include your franking credits in a separate column. Note it's important not to include any dividend reinvestment in column C, otherwise you end up double-counting in column E.

This gives you total annualised return over multiple years or portions of a year, correctly handing where you buy or sell portions of your holding, and doesn't count 'new money' (eg, from inheritance or your own hard work) as an investment return.

 

[ROE]

most software package will do it for you something like topshare.com.au

 

[Klogg]

To close off this thread - thanks to all for your help. I've followed Ves' and skc's proposal of a managed fund. And it gave me the following:

Start (10/2011) - NTA/share = $1
Current (11/2013) - NTA/Share = $1.748
(Includes dividends & taxes/CGT [applicable to the financial structure in place])

Gut feel is the majority of this comes from the lucky timing I had with the market... however, if I look at my purchases, everything I bought between 10/11 and 02/12 I subsequently sold since, and made VERY little on it (< 1%).
In effect, after learning a lot more through experience, reading and all the rest, my profitable investing (unless current holdings are substantially overvalued) started at 02/12. I'm not using this as an excuse, but to find mistakes that I can improve upon.

Now I have a much better view on my performance, which should help in assessing my valuations and ultimately investment choices.

Thanks again to all