One of the things I keep on talking about is measuring our trading and/or investing returns against a relevant benchmark such as the JSE’s Top40 or All Share Index.
But how do we measure them? We can’t use our broker’s website as it typically just gives the cost price we paid for a share and if we’ve made a few purchases over the years, it’ll be an average price.
Further, the return is that average price since the date of purchase and does not include dividends we may have received over the period.
So, in order to know what our actual returns over a period are, we need to do some work and unitise our portfolio. This is simple enough and once we have started the process, keeping the figures up to date is very easy.
Selecting a start date
The first step is to decide on a start date. Using today as that start date is easiest for a number of reasons, although going back in time would be ideal as we’d then have historic returns.
The problem with using a start date in the past is that you’ll potentially have to do a lot of work to get you to today, especially if you regularly add or remove money from the portfolio.
That said, I think it is well worth the couple of hours’ effort to use a start date of three years back so that you get some indication of how your portfolio has been doing.
For now I’ll assume that you are starting calculations today and will do some tweaking to backdate them at the end.
Unitising your portfolio
Log into your broker account and write down the total value of holdings and cash in your portfolio. I do each methodology separately and so have my long-term, second-tier and various trading strategies each recorded separately so I can see how each is doing.
This rand value is your start value and we unitise it. So, for example, if the portfolio is worth R25 000 we start with 500 units at R50 per unit (500 units X R50 = R25 000).
The number of units really does not matter but I would suggest a unit price of around R50 to R100.
That’s it. Now your portfolio is unitised. You have 500 units at R50 each. A few months later you’d check again and the portfolio value is R27 500 as prices have increased and dividends flowed into the account while costs have been deducted.
This means your 500 units are now worth R55 (R27 500 ÷ 500) and this is a 10% growth on the initial R50. (See how easy it is to determine portfolio growth?)
All price changes, dividends and fees (brokerage, admin and data fees) are taken into account as they reflect in the portfolio balance.
Adding or withdrawing money
Then you may want to take some money out or perhaps add some funds. In this case, we adjust the unit number.
With 500 units at R55 each, if you add R3 000 to the portfolio, you do so at R55 per unit. The number of units therefore increases by 54.5 (R3 000 ÷ R55 = 54.5) and you now have 554.5 units, still at R55 each = R30 497.50 (some slippage so maybe do the units to two decimal points).
To withdraw you use the same process, but reduce the number of units. So, if you removed R3 000, the number of units would decrease by 54.5 and you’d be left with 445.5, down from the initial 500.
Changes in the value of the portfolio changes unit value, while money added or removed changes the number of units.
Backdating the figures
If you’re “travelling back in time” to do this exercise, you’ll need the portfolio value from that point in time and you could use a monthly statement or an annual tax statement as the starting point. You then need to adjust for every deposit or withdrawal to get a current value and should hence be able to calculate a return.
This article originally appeared in the 2 November edition of finweek. Buy and download the magazine here.