Saturday, 25 January 2014

Tracking your investment portfolio performance Pt 2

As it is important to track your own portfolio in CAGR terms, I shall explain the process of how you can do it using excel's XIRR function. Will use the example below to illustrate.

1 Date Cashflow Type
2 1-Jan-14
3 1-Jun-14
4 1-Jul-14
5 1-Aug-14
6 31-Dec-14
Today's Market Value

The first column is quite self-explanatory, the date of transaction. Column B represents the cashflow from your own perspective, i.e. an investment means a cash outflow (negative), and a withdrawal or cash dividend collected represents a cash inflow (positive).

The last row is to be updated with today's date, and the market value of the entire portfolio's current valuation, i.e. the money you were to get if you sell everything you have. This has to be done whenever you want to compute your CAGR. For the example, the formula would be =XIRR(B2:B6,A2:A6).
This will give you 14.2% return, from the profit of $150 made in the year.

If you are trading in other currencies say USD, you would similarly track you SGD cash outflow and inflow into a USD trading account. At the end of the day, the SGD market value would be the sum your stocks' USD value and the trading account USD balance multiply by today's exchange rate.

The process is definitely tedious. You can either continue to "act blur" with regards to your own true investment performance or get down to calculating it.

I tracked the performance of the my 3 portfolios mentioned in my previous post, wanting to see how each of them perform in a time period of 5 years. I used the STI as a rough gauge of their performance. It is to be noted that this is not an apple-to-apple comparison, as my own portfolio consists of regular investment over the period stated, whereas the STI performance is based on one lump sum investment at the beginning of the period.

I have 3 different spreadsheets tracking each of their performance. To compute the overall portfolio performance, just need to copy them into one spreadsheet and sort the first column by date. A superb spreadsheet for tracking stocks can be found here.

Stocks Portfolio
28 Apr 2008 till 20 Jan 2014
STI Absolute Gain/Loss -4.2%
Personal Stock Portfolio CAGR 6.3%

Unit Trust Portfolio
09 May 2012 till 20 Jan 2014
STI Absolute Gain/Loss6.1%
UT Portfolio CAGR4.0%

Permanent Portfolio
12 June 2012 till 20 Jan 2014, based on USD/SGD exchange rate of 1.268
STI Absolute Gain/Loss10.4%
PP Portfolio CAGR3.4%
Overall CAGR: 5.65%

It's be interesting to see how each of the 3 CAGRs compare 3 to 4 years down the road.

Friday, 24 January 2014

Tracking your investment portfolio performance

Investor A made an investment if $100,000 on a stock a year ago and of today, its value stands at $110,000, a paper profit of $10,000.

Similarly, Investor B made an investment of $1,000 on the same stock a month ago and of today, its value stands at $1,010, a paper profit of $10.

The question is whose investment performance is better? Investor A who made a profit of $10,000 or Investor B who made a profit of $10? The answer is Investor B, who has an annualised gain of 12% vs investor A, who has an annualised gain of only 10%.

Yes, the Compounded Annualised Growth Rate (CAGR) should be the yardstick by which we measure our investment portfolio performance, just like what the finance industry does. This is contrary to the majority, who would just tabulate how much profit/loss one makes from stock A in a certain year, stock B in another year etc in absolute value or percentage terms. Using the example above, Investor A would tell others he is standing on a profit of $10,000 or had a 10% Return On Investment (ROI) on that particular stock. His "performance" would definitely sound better than that of investor B, where in fact he is not the better of the two.

The reason you need to measure your portfolio performance by CAGR is so you can compare it easily against the performance of other financial instruments. If your CAGR for the past 10 years is say 5%, you might as well sell everything and invest purely in STI ETF which gives you annualised gains of about 5-8% depending on which time frame you are looking at.

I will elaborate how to track your portfolio's CAGR in the next post, which needs to account for buy sell transactions, dividends, foreign exchange effects if applicable. It's a rather tedious process but absolutely necessary if you want to know how well you do relative to the market.