Calculating the Performance of Your Portfolio

I have been investing in stocks for about 7 years. Until 2007, I have absolutely no idea what my rate of return was and whether I under/over performed the market.

Many of us (myself included) believe that we are better investors than we really are. We vividly recall the success of winning stock picks but somehow forget about the losers. In my case I like to think of all the money I made in PetroBras stock over the last few years. But what about the small fortune I lost trading gold futures in 2006? I almost never think about that – I have subconsciously blocked it from my memory. While it can be fun to live in a fantasy world, it is important to know the truth so that we can make smart decisions.

Why is it so hard to figure out my return? Because I’ve been continuously adding money to my brokerage accounts…. Sure my account is going up in size, but how much is a result of savings and how much from positive returns? I use Excel and the formulas below to easily track my portfolio returns. Now that everything is setup, it takes less than 5 minutes per month.

Monthly Return:

Each month I compute the time-weighted-return of my portfolio. This tells me the return of my portfolio for the month and takes into account any deposits or withdrawals:

Rate of Return = Change in Mkt Value / (Beg Bal + (Net Contributions * Factor of days in Month)

For example, if I contribute $1,000 into my account on the 20^th day of June, I would multiply the contribution by .33 (10/30). This is done because the $1,000 contribution was only in the account for 1/3 of the days in June.

Calculating Compounded Monthly Return:

Use this formula to calculate the compounded monthly (or any period) return in your portfolio:

Return for the Year = (1 + R1)*(1 + R2)……(1 + R12) – 1

In the above formula, R1 = rate of return for January, R2 = rate of return for Feb, etc.

Q2 2007 Portfolio Review

Q1 Update: In my Q1 portfolio review, I said the following:

Notwithstanding the benefits I have derived thus far, it is not smart to put money in the stock market which you will need in the next 1-3 years. So today I liquidated the stocks and bought a Short Term New York AMT-Free Municipal Bond Fund which pays about 3.1%. I have to completely segregate the money into a separate account so that I’m not tempted to trade with it!

As it turns out, this statement was a lie. When I wrote it, I had indeed planned to move the cash into the Short Term New York AMT-Free Municipal Bond Fund the very next day. Instead, I bought a bunch of Japanese Yen. I own the Yen as kind of a contrarian investment. That’s irrelevant though. Point is, I do not have self control – if I have cash in my brokerage account, I just have to mess with it.

Q2 Review: As a result of all this, I am starting to think a lot more about asset allocation and organization. Up to now, my approach to allocation has been haphazard at best. By the Q3 ’07 I want to be treating my accounts as follows:

Taxable Brokerage Account(s):
* In this account I want to have “great” stocks which I hold for long periods of time. Every year, I should sell anything with a short-term loss. Hopefully I will generate $3,000 in short-term loss per year. I will only take long term gains, and only if there is a very compelling reason. In my taxable account I am doing way too much trading!

Roth IRA:
* Here is where I should do all of the trading. By Q3 ‘07, anything that I own in here that deserves to be a core holding should be sold and purchased in the taxable brokerage account.

401(k):
* Today I am invested in international/emerging markets growth mutual funds. I fully expect and hope for lots of volatility in these funds. No action needed here.

Cash Management:
* The goal for this account should be to maximize my after-tax return. Living in NYC, it probably makes sense to put free cash into a muni-fund, but I have to crunch the numbers to be sure.

This is not a perfect setup but I think it will be an improvement over the current arrangement. Now that I have a good system in place for accurately tracking the performance of my accounts, it’s something that can be objectively evaluated at some point in the future.

Here is the YTD performance of my portfolio (which includes the above-mentioned accounts):

2007		My Return	S&P 500
Jan '07		-0.41%	1.51%
Feb '07		-0.22%	-1.96%
Mar '07		1.66%	1.12%
Apr '07		2.80%	4.43%
May '07		1.97%	3.49%
Jun '07		0%	-1.66%
YTD		5.89%	6.95%

Q1 2007 Portfolio Review

At the end of Q1 2007, I performed a comprehensive review of my personal balance sheet. As part of this review, I “realized” that I have an inordinate amount of risk due to the misalignment of my assets and liabilities.

Through a combination of savings and a gift from my grandfather, I have set aside some money to be used for grad school tuition. I expect to need this money in Fall of ’08 or ’09. Up to now, I have had the entire amount invested in the stock market. This has leveraged up my networth and has been a source of excess returns for the past year or so.

Notwithstanding the benefits I have derived thus far, it is not smart to put money in the stock market which you will need in the next 1-3 years. So today I liquidated the stocks and bought a Short Term New York AMT-Free Municipal Bond Fund which pays about 3.1%. I have to completely segregate the money into a separate account so that I’m not tempted to trade with it!

For Q1 ’07, my portfolio returned 1.07% compared to .64% for the S&P 500:

Q1 Portfolio Returns*
	My Return	S&P 500 Return
Jan - 07	-0.41%	1.51%
Feb - 07	-0.22%	-1.96%
Mar - 07	1.66%	1.12%
	1.01%	0.64%

* Includes retirement & non-retirement accounts. Also includes interest earned on cash balances.