Estimating Your Investment Performance

When it comes to investing, do you really know what your return is? Most investors rely on either their advisor to provide this information or use third party software to get their results. But you can do it yourself if you would like. Now before you go running for the hills, know that the math involved isn’t terribly complex. But there is math involved and the method I present below won’t be 100% accurate. However the resulting number is a close approximation of your performance and for most investors, this will suffice.

Importance of Knowing Your Return

While I am not a big fan of trying to beat the market, it is important to see how your investments are performing. Yes there will be years where international funds are performing poorly and this isn’t a reason to sell. But if you find that overall your portfolio is lagging compared to the market as a whole, having performance numbers can help shed some light on why this might be the case.

Estimating Performance Without Additions or Withdraws

The first calculation you perform to get your return is one to be used if you didn’t add or subtract any money from your portfolio during the year. Let’s say you invested $10,000 and at the end of the year your portfolio is worth $10,900.

To get your return, simply take the ending amount divided by the beginning amount and then subtract by one. Finally, multiply this number by 100 and add a percentage sign and you have your return. So, $10,900 divided by $10,000 gets us 1.09. We subtract the 1 to arrive at 0.09. We then multiply this number by 100 and add the percent sign to get 9%.

For the year, the return for this hypothetical portfolio was 9%.

Estimating Performance With Transactions Involved

Unfortunately, most of our portfolios aren’t as simple as the above example. Most likely we are adding money throughout the year and in some cases, we are taking money out. How then do we calculate our return?

The math is a little more complex in this case. This is because the additions or withdraws skew the numbers. Looking back at our above example, if we had added $500 to the portfolio during the year, then the portfolio didn’t grow by $900. It only grew by $400, hence the 9% return is misleading.
On the surface, you might think you could just subtract out the additional investment and perform the calculation from above. But it doesn’t work to do this because of various factors.

So how do we account for this transaction? Here is the process you would take:
Take the year-end value and subtract half of the net additions. Next, divide that number by the beginning value plus half the net additions. Then subtract one from this number and multiply by 100 and add the percent sign.

So taking our example from above, with a beginning value of $10,000 an ending value of $10,900 and $500 in additions, it would look like this.

$10,900 minus $250 which equals $10,650. We divide this number by $10,250 (the beginning value plus $250) and get 1.039. After subtracting 1, we get to 0.039. Multiply by 100 and add the percent sign and we end up with 3.9%

Final Thoughts

So there is how you would go about estimating your portfolio performance. While it won’t be 100% exact, it will be a close estimate. But understand that this is only for one year. If you want to estimate your portfolio over multiple years, the math gets more complex. It is at this time when you would want to seek out a program to work the math for you.

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