Understanding your return on investment (ROR) is critical to understanding your portfolio performance. There are just too many ways to calculate stocks, but there is only one way to really calculate the performance of a portfolio.
I’ve never been satisfied with Quicken’s ROR calculation, and I’ve always questioned the numbers. More importantly, how do you calculate an accurate return when your stocks are reinvested?
I am sure there is generally recognized accounting method For the ROR and I know there is one from a tax standpoint, but I’ve decided to follow the rules below:
- It’s based on the money I invest, not the stocks I buy. That said, the math starts counting as soon as I add cash to the account, rather than when I buy a stock.
- It is based on the value of the account including cash and not the value of the shares. It’s the last number at the end of your statement.
- Equity investments, mutual funds, or even GICs are investment vehicles used to increase the overall value of the portfolio.
Fluctuations in return
Evaluation of your profit
Let’s define how you rate your bottom line. I think it is important to understand how to calculate your profit as it can be calculated in different ways and the total value of your portfolio takes your profit into account.
Win with GIC
Profit = (capital + interest) – capital
The principal is your original amount and the interest is what you make on your investments.
Profits on stocks
Profit = (capital + capital gains) – capital
The principal is your original investment and the capital gains are the profit (or loss) on your investment. Your capital gain is defined by the following formula: number of shares * (market value – purchase price). If you sold the stock, this is the selling price; otherwise, it is a paper capital gain.
Profits on dividend stocks
Profit = (capital + capital gains + dividends) – capital.
The same definition as above applies to adding up the dividends you have earned. The principal would be the initial share purchase multiplied by the purchase price, and the capital gains would also be calculated using the initial number of shares. The dividends would come from dividends earned (even if reinvested).
I kept this for the last time, like a tax-free account. The winnings are easy, but with an unregistered account you need to take into account the taxes that will be paid. However, I am now keeping it simple and ignoring taxes.
A simple way to calculate your account return
For the longest time I thought I would need to track all of my transactions to get an accurate picture and that is a lot of work. Let’s just be realistic. With dividends coming in every month and some of them DRIPed, settling every transaction across multiple accounts can become quite a chore. I already have to do this in unregistered accounts for tax reasons, but I don’t want to do this with all accounts.
I had to think differently and ignore the actual investments I have. It’s like a black box inside and I focus on the money I’ve invested and how much it’s worth overall. Part of it is invested and part in cash. All matters are the following:
- When and how much is invested
- The total value of the account
I decided to manage it by account, but you can do it for your overall portfolio as you have the transactions for each account. The trick is simple as all you have to do is use Excel or Google Spreadsheet’s XIRR function. Let’s use the TFSA as an example as most will be familiar with the account. The grand total for the day simply uses today’s date and my total account value as the negative value. It has to be negative for the XIRR formula to work.
In the example above, I basically have an annualized return of 11.51% on my TFSA account. I hope to double the value within 7 years and need at least 10% per year for that if I use rule 72.
When you withdraw from your TFSA, simply enter the withdrawal with the relevant transaction date and your annualized return will be adjusted accordingly. What I have done is keep track of the amount of money I deposited into the account as opposed to the individual investments and it is much easier that way.
Step by step instructions
No matter what, pen and paper should be put aside in favor of using a spreadsheet in this digital age. You can use Google Sheet or Excel and set up a comprehensive portfolio tracker with the following post as a guide.
Portfolio & Dividend Tracker [Build Yours in 6 Steps]