Fun­da­men­tals: How to mea­sure trad­ing or in­vest­ing re­turns

In order to com­pare your port­fo­lio to bench­marks like the JSE’s Top40, you need to be able to mon­i­tor your ac­tual re­turns. Si­mon Brown fol­lows a few sim­ple steps to mea­sure growth in his port­fo­lio.

Finweek English Edition - - Contents - By Si­mon Brown

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.

To know what our ac­tual re­turns are over a pe­riod, we need to do some work and uni­tise our port­fo­lio. It is sim­ple enough and once we have started, keep­ing the fig­ures up to date is very easy.

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. ■ ed­i­to­rial@fin­

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