Ask anyone how they are doing on their returns, and they will be able to give you a startlingly accurate number, however it’s impossible to accurately compare these numbers unless you understand exactly how people arrive at them.
The best I have heard in terms of returns, was someone quoting in excess of 1,000% returns – something not even the greatest investors have ever been able to achieve, so how was this mortal able to do this, and if he was getting these returns, why on earth was he still working?! On digging deeper it turns out that he calculated this by looking at each of the purchases he made, and their return, and adding the total up. He only needed to have a portfolio of 10 shares all go up by 10% to make a 100% return. Sometimes I really do worry about the human race, especially when these are supposed to be educated people!
I know some out there use excel’s XIRR function, or unitise their portfolios to enable them to get a very granular level of tracking, but for me I am just a little too lazy for that! So my approach is:
- Take the value of that particular portfolio / asset at the start of the measuring period (be it month or year). As an example, lets say £10,000 of the period of a year
- Any contributions / additions made during the period (including any fee costs such as IFA cost or trading fees) are added to the starting value of the portfolio / asset. For the example, lets say we added £1,200 over the year (£100 per month goes in regardless of charges)
- Take the value of the portfolio / asset at the end of the measuring period. For this example lets say £12,000
- To calculate the performance, it’s simply the difference between the end and start value divided by the starting value. In this case, (12000-11200)/11200 – which gives a portfolio return of just over 7%
This isn’t strictly a fair measure, as the £100 added (and assumed invested) in the first month will have longer to generate a return than the £100 added in the last month, which will probably do nothing in reality. If anything this means I probably report a lower return than I actually achieve for any portfolio I add to during the reporting period, but to be honest, I am happy with that – it’s another element of contingency for me. If I report I average 5% and my calculations and predictions are based on that, but in reality the proper number is 6% then it means I will just get there faster, I don’t think I can complain at that!
One thing to flag here, if you haven’t already spotted it, is of course that this means on months where I get a bunch of dividends paid out I should get a very good bonus return.
To then benchmark it, I simply take the change in the FTSE-100, 250, All Share, DOW and S&P500 – all excluding dividends – and track how they progressed over the same period (excluding dividends, so somewhat biased).
My somewhat insane and nonsensical aim is to beat all of them. For most people this would make absolutely no sense – why not just go for the World Tracker or something or pick a specific area. I go for all on a number of grounds. Firstly, by collecting data on all of them I can see their overall performance over time which may influence my decision on trackers in the future. Secondly, if I beat all of them consistently then I am going to be a seriously happy bunny. If they all beat me consistently I will tell myself it’s time to go for just trackers!
Performance to date
So I am now doing a monthly update on performance across all of the different wrapper portfolios (I say wrappers, as I have 3 portfolios in one wrapper which will make it harder, each also having a different objective). I also track based on a financial year to make calculation of contributions etc. easier for my simple little brain.
So far, year on year I have done ok, some better than others. I will continue to reflect the performance on both the monthly updates and also on the yearly appraisal!
So how have the previous years been for me? Well, that will follow this years review I will do a retrospective and see, across all the channels, where I am.
How do you measure your returns, or do you even track the performance?