StockNovice, allow me to thank you once again (future thanks are included as well) for enlightening us how to take care for our future! I adore the way you describe and write your thoughts.
If possible could you share how you calculate your returns? I thought I have a proper formulas for my sheet, but recently I found a few formulas for TWR and applying them for test purposes I am getting different results.
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 the great insights and review ! Qn on ZM, did they mention what growth rates will be next year ? Hoping it can still maintain 50-80% growth.
Not that I have have seen. I guess there is a slight chance they hint at next year's revenues in their Q3 release, but it's hard to think they will have much insight given the uncertainty of COVID and what effects that might have on their business.
StockNovice, allow me to thank you once again (future thanks are included as well) for enlightening us how to take care for our future! I adore the way you describe and write your thoughts.
If possible could you share how you calculate your returns? I thought I have a proper formulas for my sheet, but recently I found a few formulas for TWR and applying them for test purposes I am getting different results.
Thank you in advance.
Be safe.
You're very welcome. Thanks for the question.
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.
Dear StockNovice,
I am eager to answer you!
Definitely your answer is in big help, indeed.
Sincerely thank you! I am learning from you more than you think.
Thank you big time !
My best and sincerest wishes
Thank you for the great insights and review ! Qn on ZM, did they mention what growth rates will be next year ? Hoping it can still maintain 50-80% growth.
Not that I have have seen. I guess there is a slight chance they hint at next year's revenues in their Q3 release, but it's hard to think they will have much insight given the uncertainty of COVID and what effects that might have on their business.
Thank you for sharing. Incredible insight.