Portfolio Performance

I’ve got a question about handling certain cash transactions and how to incorporate them as part of the performance measure.

I completely get the idea of recalculating the performance factor with an injection of cash from outside the investments. And similarly, recalculate in the event of a cash withdrawal.

But what do you do about cash generated within the portfolio such as dividends or the sale of an option. I imagine the same would apply to a withdrawal by way of margin interest.

Are these cash transactions measured as part of the overall performance (in other words, the performance factor does not change)? Or are they to be considered “external” transactions which would require recalculating the performance factor?

I look only at external cash in-flows and cash out-flows. If you have dates on which these transactions happened you can easily calculate the internal rate of return of your portfolio. You use your portfolio’s current NAV as the final out-flow amount. Google spreadsheets have the XIRR function that can do this calculation for you. Note that any dividends, gains etc are either reflected in your NAV or in your cash drawdowns so you don’t need to consider it separately.

Do you need an example spreadsheet?

Anirban.

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Note that, ideally, if the cash inflow is something like a dividend from an individual stock, it is desirable to recognize that as a part of the performance of that stock, not just the performance of the portfolio as a whole. If the dividend is reinvested, that is easy, since it is additional shares at no cost. A cash dividend is a bit trickier …

tamhas,

if we are looking at the overall portfolio performance, we shouldn’t have to worry about the performance of individual stocks. That level of details is needed to determine the winners and losers in the portfolio but not necessary if the goal is to determine portfolio’s returns.

That’s my opinion but agree there are many ways to skin the cat.

Anirban

Anirban,

As someone who sometimes struggles with Excel, an example spreadsheet would be massively appreciated! I’d love to play around with it.

Are there any particular advantages to using Excel to track your portfolio and returns? Currently, I track my investments in both the MF Scorecard and Google Finance.

Best,
Nat

Thanks all for the speedy replies . . .

I am setting up an Excel spreadsheet so that’s what prompted the question. I’m far from an Excel whiz so I’m trying to keep it simple. Tracking dividends, option sales, margin interest (I don’t use margin - just saying), etc. to the particular stock is more than I care to mess with. I’ll just keep it at the portfolio level.

As for the performance of individual stocks, I’ll let the average buy price compared to the current market price tell the story. I don’t need to get any more specific than that. Most of my investments don’t earn dividends anyway and I only dabble in options. Then it gets really messy with puts when I don’t even own the stock and don’t take assignment - just too much fuss and bother for very little useful information.

But what do you do about cash generated within the portfolio such as dividends or the sale of an option. I imagine the same would apply to a withdrawal by way of margin interest. Are these cash transactions measured as part of the overall performance (in other words, the performance factor does not change)? Or are they to be considered “external” transactions which would require recalculating the performance factor?

Hi BrittleRock. These are part of the performance of the account.
Saul

I should have specified that that’s as long as the dividends, etc stay in the account and aren’t paid to you in a separate check, in which case they’d be a withdrawal from the account.

I use two different methods, one to calculate the performance of individual positions and another to calculate portfolio performance.

For positions I use the Internal Rate of Return (xirr) of all cash flows for that position including shares, warrants, options, dividends and expenses. The origin and destination of the funds does not matter.

For the portfolio as a whole I just use start and end values including any cash that is sitting in the account waiting to be invested. The start and end values should be adjusted for additions and withdrawals but the account’s internal cash movements like dividends are ignored.

Denny Schlesinger

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Anirban, perhaps I wasn’t clear. If one’s interest is only at the portfolio level, then sure, it makes no difference. The difference comes in seeing the real contribution of an individual holding. I have held QCOM for many, many years and failed to capture its dividends in a way that allows me to see the real contribution of QCOM to my portfolio. I know it is a lot more than the mere increase in stock price, which is non-trivial, but I don’t know how much and I wish I did.