Portfolio Performance Question

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Saul,
I’ve set up some spreadsheets to keep track of my portfolios. I’ve adopted your method of setting a unity factor at the beginning year value and tracking growth (or if things go bad, shrinkage) by multiplying present value by the factor.

I understand how to adjust the factor based on the introduction or withdrawal of cash. I assume the same method applies to the introduction or withdrawal of equities, but this does introduce a new wrinkle.

I’ve got four portfolios. I currently have an advantageous tax situation which I am using to migrate my traditional IRA to my Roth IRA. But here’s the rub. As I merge the portfolios I’m wondering how I account for the past performance of the trad IRA which will be eliminated at the completion of this action.

The two IRA portfolios are significantly different in both size and composition with the Roth being about 4x larger in value and holding 19 companies while the trad holds 5 positions. The two portfolios only have two positions in common.

I’ve got two notions on how to do this: 1) Just take a snap-shot of closing price when the stock moves and treat it as a cash infusion (this is the amount I’ll have to pay taxes on). Forget about past performance. 2) Add the two beginning year valuations together and calculate a new factor based on this amount, then move the equities from the trad IRA to the Roth and pretend like they were there all along. Whatever growth or shrinkage they’ve experienced will just factor into the overall performance of the Roth.

The second approach seems like it appropriately accounts for the performance of the trad IRA. But I’m not entirely sure. What would you do?

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Hi Brittlerock,

That’s an interesting question. I don’t face it because I pool all the stocks in all my accounts when I track them. The question for you is how to avoid losing the past performance of the smaller traditional IRA when you merge them.

You say the Roth is four times bigger. At first I thought you could average their results up to now weighting the Roth four times the original and then calculate a new factor. That would work fine for this year, but not for past years because you’ve undoubtedly had them for different lengths of time. Let’s look at this year. Say the Roth is up 8% and the Trad is up 3%. You’d figure 4 times 8%, plus 1 times 3% = 35%, divided by 5, which gives you 7%. Then you figure a new factor which gives you 7%. Or if you want to be exact, figure the total value of the Roth times 8%, plus the total value of the Trad times 3%, add them together and divided by the total value of both combined. That gives you an accurate combined percentage gain for this year, and you calculate a new factor.

Does this help? Any questions?

Saul

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I also look at my portfolio as a whole. Is there a reason why you want to compare your IRAS vs looking at your overall investments?

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Is there a reason? Yes. Is there a good reason? Probably not.

To be honest, my investment maintenance is rather a mess. I have four separate portfolios maintained across three separate brokerage firms. Why? Well, for example Fidelity had a promotion where if you opened an account of a given size (I think it was $100k) you were awarded 70,000 Delta Skymiles. That’s a round trip to China. My wife is Chinese. So I moved a bunch of equities from Scottrade and I now have a Fidelity account. Is that a good reason? Maybe not, but it made sense to me at the time. I won’t go through all my rationales for the way I have things organized (or disorganized). There was a reason at the time.

In the past, I have never actually measured my performance by portfolio. I tended to follow each individual stock. My thinking was that if the individual stocks were performing well, then the portfolios was doing OK by default.

I subscribed to some TMF services and followed the advice, kind of. I didn’t buy every recommendation. I didn’t hold every investment forever. I also made some investment decisions that were completely independent of TMF. I could complain about some of the TMF advice, but for the most part, I did pretty well by picking an choosing which to buy and when to bail. By far, the worst decisions I made were the ones that were independent of TMF. For example, I bought some stocks in the energy sector primarily for the dividends. They tanked while I wasn’t paying attention. I decided that shouldn’t happen again. I held over 30 companies. You (I mean I, maybe you are different) just can’t really follow that many different companies. Diversity may reduce risk, but it holds it’s own risk of guaranteed mediocre performance. May as well buy a mutual fund or and index fund. Actually, I tried that. I had a bunch of mutual funds based on expensive advice from Edward Jones. After under performing the S&P for 2 years I had enough. That’s when I subscribed to TMF.

But as noted, even though I did far better than I did with the Edward Jones advice, I still made some pretty serious mistakes. It was those bad decisions that made me sit up and decide to take this whole investment activity a lot more seriously. That and finding this board.

Saul is a smart investor, but he’s not a genius - well maybe he is, I don’t really know - but I do know that you don’t have to be a genius to emulate his methodology, it’s not all that complicated or difficult. I’m confident he would agree. I’m not a genius, but I’m a pretty quick study.

So this year, I’ve been getting much better organized. Information is valuable and powerful. I spent 30 years at Boeing helping other folks organize, utilize and manage information. Time I put some of that experience to work for my own benefit.

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In the past, I have never actually measured my performance by portfolio. I tended to follow each individual stock. My thinking was that if the individual stocks were performing well, then the portfolios was doing OK by default.

brittlerock:

That is how I think. CAGR is additive, if all you stocks are ticking so is the portfolio.

IMO, the best tracking is done by calculating the Internal Rate of Return (IRR) (Excel function XIRR) of each stock. If you don’t use options the input data is the cash of each transaction (buy/sell). With some option trades one should take into account the money put at risk. Writing puts are cash secured options. That cash needs to be included in the IRR. By tracking individual positions one can design a strategy for each type of stock and specific tactics for each stock. It becomes easy to compare the positions, the higher the IRR the better.

One example: I bought AXP back in 2008 at $37.08, it crashed and came back after 2009.

AXP 30: http://invest.kleinnet.com/bmw1/stats30/AXP.html

I was doing better than AXP’s historic average of around 12% CAGR but I noticed that my IRR on AXP was decreasing which put it on a sell watch list. I use one of two methods to sell: sell covered calls or sell outright. When the calls didn’t yield enough, when I needed cash for new stocks I wanted to buy and when the chart looked toppy, it was time to sell outright. Sold at $90.92. Now down to $79.63. This is just one example of how good tracking helps performance (it doesn’t work out that well in all cases).

To track the portfolio as a whole I just use start and end valuations. You could use the same IRR method but I don’t think it is worth the effort. The information you get from the whole portfolio performance is whether your overall strategy is working or not.

Why use IRR? Because it is the way to track cash flow. If you just buy, hold and sell then then IRR will give the same result as starting and ending value but if you trade the stock or use options you need IRR to get a more realistic picture.

Denny Schlesinger

PS: My total return on AXP was 15.4% beating its average CAGR. Options helped a lot.

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Great, you can help us get organized, that sounds awesome.

I have only calculated returns once, but there is a formula for it, that’s easy. Perhaps someone can help describe it.

You add up your beginning and ending balance, and then you somehow account for your deposits and withdrawals, and then you can find your rate of return.

I need to practice. I want to go back and check over 2014 as a whole year. (My accounts are in 2 places at Vanguard, his n hers). Vanguard has a “portfolio performance” only total, and thats what I used to be quick the first time I tried it. But I added up the two account totals for a comprehensive portfolio value. And that is better, to know all of your assets are getting %%, than knowing that this pot is getting X%, that pile is getting y%, that group is getting Z%.

Karen

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Or in Saul’s case, XY% and ABC% and FGHI%. :slight_smile:

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You add up your beginning and ending balance, and then you somehow account for your deposits and withdrawals, and then you can find your rate of return.

Internal Rate of Return (IRR) Excel function XIRR!

Denny Schlesinger

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I have only calculated returns once, but there is a formula for it, that’s easy. Perhaps someone can help describe it.

Hi Karen, It’s all in the FAQ. (That’s what we have the FAQ for). :wink:

Here it is:

## Calculating Portfolio Returns
--------------------------------------------------------
* I retired in July 1996, so I’ve actually been taking out money to live on ever since, instead of adding money.

Here’s how to calculate it. 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 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 and start over at 100 for the next year. [Post 26]

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Karen (and others),

For those who want to use Excel and xirr function and have access to SA here is a link to TMF Tortoise post about it and his offer to send out a copy of his xirr spreadsheet:

http://discussion.fool.com/1081/hi-john-i-dont-think-youre-using…

If you don’t have SA I’m pretty sure Jim wouldn’t mind if I forward a copy of his xirr spreadsheet if you email me directly.

David

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Jim Mueller based his post on these two old TMF articles about calculating returns (Part 1):

http://www.fool.com/investing/small-cap/2005/07/11/computing…

Part 2 link:

http://www.fool.com/investing/small-cap/2005/07/12/keep-trac…

D.