You wrote a post a while back explaining how to best calculate portfolio returns. I just cannot find it. Can you please tell me which one it was. Pardon my ignorance.
You're very welcome. I think you might be referring to a post in the comments from October. I copied it below. Let me know if this isn't what you're looking for.
For short term returns of month- or year-to-date, I use this formula:
That simple formula should work fine as long as you don’t add or subtract funds. That's where some sort of time weighted formula comes in handy so new funds aren’t directly counted as gains or losses. For example, I contribute on the 1st of every month, so I need to reset my return rate on that date so those contributions aren't counted as investment gains. The method I use was learned on a message board called "Saul's Investment Discussions" at the Motley Fool website. The math is described below:
"Here's how to calculate your overall returns ignoring cash flow in or out. Say you start the year with $14,000. You want to equate that with 100% and calculate gains and losses from there. So you ask yourself "What number (factor) would I multiply $14,000 by to get 100?"
By simple arithmetic we have 14000 x F = 100
And thus F = 100/14000 = .0071428
Sure enough 14,000 x .0071428 = 100
Now say three weeks later you have $14,740 and you want to see how you are doing, you multiply that number by .0071428 and you get 105.3 (so you are up 5.3%). If you don't add or subtract money, that factor will work for the whole year.
Now say you add $2300 of fresh money, but you don't want that to screw up your estimate of how well you are doing.
You add the $2300 to the $14,740 and get $17,040 which is your new balance that you are investing with. That's your new starting point. It doesn't affect how you've done up to here.
You haven't suddenly done better because you added money. You can't still multiply by .0071428 because you'd get 121.7 and it would look as if you were up 21.7%, when you are really only up 5.3%.
So you need to change your factor to make it smaller so it will still reflect just the 5.3% gain you've made so far. You figure: "What would I multiply my new balance ($17,040) by to get 105.3, to reflect my 5.3% gain so far this year?"
F x 17,040 = 105.3
F = 105.3/17,040 = .0061795
And that's your new factor. If you multiply it by 17,040, sure enough you get 105.3. Now you continue to see how you will do for the rest of the year.
If a little later you are at $18,000, you multiply 18,000 by .0061795 and you get 111.2, so you know that your investing is now up 11.2% for the year.
Same, if you take money out. You don't want it to look as if you lost money. You calculate a new factor so you start from the same percentage where you were.
On January 1st of the next year, you write down how you did for the year to keep a record, and start over at 100 for the next year."
As for me, I just enter the new factor in Excel on whatever date the transaction occurs and go from there. I hope that answers your question.
Thank you for sharing your thoughts, Joe! I always appreciate your insights.
The Ian Cassel tweet and the lessons learned were an eye-opener for me, especially when I'm still hanging on to my remainder of Fastly shares (after trimming them last quarter).
I was curious to know the importance of taking taxes into consideration when you sell out of a position with huge gains. Do you ever consider that or your situation is different in a way that you've got a majority of your portfolio in non-taxable accounts?
Fortunately, most of our portfolio is in non-taxable accounts so taxes aren't as large a consideration for us as most. Any trimming is always done with non-taxable shares first to avoid the issue entirely. However, I generally don't consider taxes that strongly when I exit a position entirely unless the shares are close enough to becoming a long-term gain to make it worthwhile. This is for two reasons:
1) The main catalyst behind the sale is usually the fact I NO LONGER WANT TO OWN THE STOCK. I can't forget that.
2) I figure it's always better to have capital gains than a loss. In that respect, I view taxes as more of the cost of doing business for a successful investment.
One of the tricks I've learned along the way is trying to spread out our taxable exposure as best I can when making buys. For most of our firms, we own both taxable and non-taxable shares. I try to think of those as two separate buckets. For example, say I have money to deposit into our taxable account and want more CRWD. However, CRWD is also our largest taxable position, so I'd rather add non-taxable shares. To make that happen, I will buy shares in a smaller taxable position - let's say TWLO - and then sell the same exact amount of TWLO in an IRA to create cash. I then use the IRA cash for more CRWD. So, even though our total allocations can get pretty spread out, this makes our taxable allocations a lot closer to each other. I figure we can't avoid taxes entirely, but I might be able to at least spread out the exposure out a bit as we go.
Please let me know if that explanation's not clear.
Great insights as always. Thx for sharing!
You wrote a post a while back explaining how to best calculate portfolio returns. I just cannot find it. Can you please tell me which one it was. Pardon my ignorance.
Thx!
You're very welcome. I think you might be referring to a post in the comments from October. I copied it below. Let me know if this isn't what you're looking for.
For short term returns of month- or year-to-date, I use this formula:
(current balance – beginning balance) / beginning balance.
Example:
Started with $100; Now $125
(125-100)/100 = .25 = 25%
That simple formula should work fine as long as you don’t add or subtract funds. That's where some sort of time weighted formula comes in handy so new funds aren’t directly counted as gains or losses. For example, I contribute on the 1st of every month, so I need to reset my return rate on that date so those contributions aren't counted as investment gains. The method I use was learned on a message board called "Saul's Investment Discussions" at the Motley Fool website. The math is described below:
"Here's how to calculate your overall returns ignoring cash flow in or out. Say you start the year with $14,000. You want to equate that with 100% and calculate gains and losses from there. So you ask yourself "What number (factor) would I multiply $14,000 by to get 100?"
By simple arithmetic we have 14000 x F = 100
And thus F = 100/14000 = .0071428
Sure enough 14,000 x .0071428 = 100
Now say three weeks later you have $14,740 and you want to see how you are doing, you multiply that number by .0071428 and you get 105.3 (so you are up 5.3%). If you don't add or subtract money, that factor will work for the whole year.
Now say you add $2300 of fresh money, but you don't want that to screw up your estimate of how well you are doing.
You add the $2300 to the $14,740 and get $17,040 which is your new balance that you are investing with. That's your new starting point. It doesn't affect how you've done up to here.
You haven't suddenly done better because you added money. You can't still multiply by .0071428 because you'd get 121.7 and it would look as if you were up 21.7%, when you are really only up 5.3%.
So you need to change your factor to make it smaller so it will still reflect just the 5.3% gain you've made so far. You figure: "What would I multiply my new balance ($17,040) by to get 105.3, to reflect my 5.3% gain so far this year?"
F x 17,040 = 105.3
F = 105.3/17,040 = .0061795
And that's your new factor. If you multiply it by 17,040, sure enough you get 105.3. Now you continue to see how you will do for the rest of the year.
If a little later you are at $18,000, you multiply 18,000 by .0061795 and you get 111.2, so you know that your investing is now up 11.2% for the year.
Same, if you take money out. You don't want it to look as if you lost money. You calculate a new factor so you start from the same percentage where you were.
On January 1st of the next year, you write down how you did for the year to keep a record, and start over at 100 for the next year."
As for me, I just enter the new factor in Excel on whatever date the transaction occurs and go from there. I hope that answers your question.
Yes, exactly. I meant the part with the factor for adding/subtracting funds. Thank you for taking the time and explaining it in detail!
Thank you for sharing your thoughts, Joe! I always appreciate your insights.
The Ian Cassel tweet and the lessons learned were an eye-opener for me, especially when I'm still hanging on to my remainder of Fastly shares (after trimming them last quarter).
I was curious to know the importance of taking taxes into consideration when you sell out of a position with huge gains. Do you ever consider that or your situation is different in a way that you've got a majority of your portfolio in non-taxable accounts?
Thanks!
Fortunately, most of our portfolio is in non-taxable accounts so taxes aren't as large a consideration for us as most. Any trimming is always done with non-taxable shares first to avoid the issue entirely. However, I generally don't consider taxes that strongly when I exit a position entirely unless the shares are close enough to becoming a long-term gain to make it worthwhile. This is for two reasons:
1) The main catalyst behind the sale is usually the fact I NO LONGER WANT TO OWN THE STOCK. I can't forget that.
2) I figure it's always better to have capital gains than a loss. In that respect, I view taxes as more of the cost of doing business for a successful investment.
One of the tricks I've learned along the way is trying to spread out our taxable exposure as best I can when making buys. For most of our firms, we own both taxable and non-taxable shares. I try to think of those as two separate buckets. For example, say I have money to deposit into our taxable account and want more CRWD. However, CRWD is also our largest taxable position, so I'd rather add non-taxable shares. To make that happen, I will buy shares in a smaller taxable position - let's say TWLO - and then sell the same exact amount of TWLO in an IRA to create cash. I then use the IRA cash for more CRWD. So, even though our total allocations can get pretty spread out, this makes our taxable allocations a lot closer to each other. I figure we can't avoid taxes entirely, but I might be able to at least spread out the exposure out a bit as we go.
Please let me know if that explanation's not clear.