Developing the discipline to invest is essential to investing success. I know that sounds basic. But it's so crucial and so often overlooked, I feel I should mention that taking calculated risks on a regular basis is foundational to success as an investor. That is, if you divert part of your paycheck to a retirement account or purchase investments (such as shares of a stock, mutual fund, or ETF) inside a regular brokerage account on a regular basis, then you've accomplished a lot.
So I hesitate to add another requirement to measuring success as an investor. But I'm thinking that you'd like to know how you're doing. More specifically, you want to know how to evaluate the performance of your investments and your various portfolios. You can then compare this number to a benchmark portfolio.
Investment results may be available from your brokerage firm
Fortunately, there are tools that allow you to view the performance of your portfolios and individual investments within your portfolios. One of my brokerage firms gives me daily gains (or losses) as well as total gains (or losses) on individual stocks, mutual funds, and ETFs when I view my positions. Another brokerage firm offers a view of prices and returns of various holdings inside my account, giving year-to-date, one-year, three-year, five-year, and 10-year returns. My robo-advisor, Betterment, gives me a total return and an annualized return. Similarly, annual returns year-to-date are reported by my husband's 401(k) provider.
But there can be flaws to some of these methods. If I've held an ETF for a couple of years, then the year-to-date and one-year return is accurate. But if I just bought an ETF or if I've made monthly purchases of a commission-free ETF over the span of a few years, then the overall return most likely won't equal my personal investment return. Similarly, the overall gain on an investment held for several years won't tell me its average annual return.
For example, I bought 30 shares of IRBT (iRobot) at a price of $77.18 on September 29, 2017 and another 30 shares at the price of $65.76 on December 1, 2017. Both transactions carried a fee of $6.95 each. Today, the share price is $128.62.
When I look at my brokerage account dashboard, I see that my gain is $3,415.10 and overall return is more than 75%. To determine the gain amount, the firm determines my average cost per share, then compares my average cost to the current price of the number of shares I purchased less the transaction fees. My average price per share is $71.47 for 60 shares ($4,302.10) so my gain is (($128.62-$71.47) x 60) – ($6.95 x 2) = $3,415.10.
The gain is based on the overall change in the investment. The investment gain percentage is calculated by identifying the investment gain and dividing this number by the original purchase amount ($3,415.10/$4,302.10) = 79.38%.
You can calculate your own investment returns
I'd like to calculate my annual rate of return, not just the overall growth. This process is easy using an Excel spreadsheet and its internal rate of return (IRR) function in a formula.
Here's the information I'll need:
- dates of investment contributions or purchases
- invested amounts on these dates (I'll want to include both the amount invested and the cost of transactions if any)
- today's date or the date associated with the measurement of performance (such as the end of the year)
- account value on a specific date like today (this value should include account maintenance fees or advisory charges)
Set up the spreadsheet by aligning dates with specific cash outflows, cash inflows, and current values.
Using the IRBT transactions I mentioned earlier, my spreadsheet looks like this:
Using this format, I enter the purchase dates, amounts, and transaction fees into the spreadsheet. When I want to view my investment return, I enter the current value of the investment and the current date into the investment value (or account value) cell. The formula to calculate the investment return is =XIRR (B8:B10 representing the series of cash flows associated with the stock purchases and current value, C8:C10 representing the series of dates associated with the cash flows), which yields 49%.
At first glance, the 49% return seems high for an investment that I started in 2017 and here we are in the year 2019. But then I noticed that my stock purchases were made at the end of 2017 and we're just a few months into 2019. Entering the exact dates into the cells allows this precise calculation.
I've also designed a spreadsheet to capture regular contributions made to my Betterment account and then determined my personal IRR based on my current account value. Fees have been deducted from the account so that the current value reflects the investment return after fees. My IRR was close to the investment return reported by Betterment (for simplicity's sake, I estimated some of my monthly contribution dates in my spreadsheet). The actual return was relatively low considering I held a high-risk portfolio (the return was 5.6%) but the information provided by the robo-advisor was accurate. However, the SEC has found another automatic adviser dispensing inaccurate and misleading information about investment returns so it makes sense to check your own returns rather than relying on outside sources.
Return calculations can be useful
Sometimes the information provided by brokerage firms doesn't tell the entire investment story. It's great to know that I've enjoyed an investment gain of 79% on a particular holding. But I need to put that gain into context by knowing whether it happened over a period of three years or 15 years.
In addition, I also suspect that some investment results contain faulty calculations. I've noticed weird (and wrong) results on my brokerage firm's dashboard after a stock split and following the spin-off of one company from another (such as the eBay and PayPal separation). To determine what really happened, I go to the transactions history tab to grab the numbers relating to purchase prices and amounts, transaction costs, etc. and then build my formulas with the original data.
Calculating your own returns is easy. This information can help you evaluate your investment strategies and help you make smarter decisions about where to put your investment dollars in the future.
How do you analyze your portfolios? Have you designed your own tools or do you prefer to use those provided by your broker?