Unitising a portfolio to determine returns

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Simon Brown, founder and director of investment education website Just One Lap. (Photo: JSE/Twitter)
Simon Brown, founder and director of investment education website Just One Lap. (Photo: JSE/Twitter)

As a decade of flat or low returns dawn on investors, Simon Brown gives a tip on how to easily determine your portfolio’s historic returns.

As I write this in mid-February, the FTSE/JSE Top 40 Index is up 13.5% for the year so far and since the lows of March last year, the index has gained 85% (I took a double take and triple checked both stats because they’re wild).

Now, sure the recovery from the bounce doesn’t really tell the story as the collapse saw the index down over a third from the January 2020 highs.

The S&P 500 Index, the clear winner over the last year and last decade, has risen by a much more modest 4.7% so far in 2021. Not shabby, but well behind the Top 40.

My point is twofold.

First off, there is the old trope that you read on all investment disclaimers: Past returns are no guarantee of future returns.

Not only is this true, but I’d also add that after a decade of above-average returns the market will rotate back to the longer-term average returns. We have seen this as US markets had a stellar run in the 90s that saw the S&P 500 up by over300% (the Nasdaq did even better).

But during the first decade of this century the S&P 500 delivered a negative 15% return (excluding dividends).

Based on the forementioned and the recent run we’ve seen in the S&P 500, it suggests that we’ll see way more modest and even flat returns in the decade ahead. This, after the US index gained almost 250% over the past ten years. Yet everybody is piling into US stocks based on the previous decade’s returns, chasing the winners.

The easy solution here is a diverse portfolio that includes offshore or US exposure but also exposure to the laggard markets of the last decade, such as Europe and emerging markets, such as South Africa.

The second point I want to make about our market’s excellent start to 2021 is to ask how your portfolio has done compared with the Top 40’s return? This refers to the first six weeks of this year. For many of us we simply have no idea how our personal discretionary portfolio is doing. 

Sure, we see lots of green numbers when we check and we figure we’re doing well, but the question is how well? Because if we’re not beating the market over time, we’re better off just buying an exchange-traded fund (ETF) to match the market.

Basically, we need to unitise our portfolios so we’ll able to track our returns. And while I’m mentioning returns over the first six weeks, we need to track our performance over extended periods of one year and longer.

To unitise we need a start date, that could be today. We could also hunt out an old broker statement and pick a point in the past. The further back the better. Say we start in January 2015, and our portfolio was worth R10 000. Unitise it into 1 000 units at 1 000c and now we have the starting point.

Now, you need to record any money that went into or out of the portfolio. Money going in increases the number of units, while money leaving reduces the number of units.

So, if the day after we started in 2015, we added another R1 000, that would increase the number of units by 100 at 1 000c a unit.

We do this every time we add or remove money. The unit value is based on the portfolio value which includes all growth and dividends and is already net of all fees and losses as that’s captured in the current value.

So, if we’ve added no extra money, nor withdrawn any and the portfolio is now worth say R22 000 and we have 1 100 units, the unit value is now 2 000c and we have realised a positive return over the period.

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This article originally appeared in the 4 March edition of finweek. You can buy and download the magazine here.

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