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Thread: Calculating Portfolio Returns
At this time of year I inevitably get asked how to calculate one's portfolio return when cash is added or withdrawn during the year, so this is a pre-emptive thread on the topic.
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At this time of year I inevitably get asked how to calculate one's portfolio return when cash is added or withdrawn during the year, so this is a pre-emptive thread on the topic.
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Assuming the return you want to calculate is for the 2020 calendar year, as a minimum you will need to have a portfolio valuation (including cash inside the portfolio) at the following dates:
31 Dec 2019
the dates on which any funds were added/withdrawn
31 Dec 2020
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31 Dec 2019 the dates on which any funds were added/withdrawn 31 Dec 2020/2
At each of those dates, you calculate the return for the period from the previous valuation date. So the first one being from 31 Dec 2019 to the date on which the first funds were added/withdrawn. Important: when calculating the return, *exclude* the funds added/withdrawn.
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So very simply, if you started the year with £100,000 and on 31 Jan 2020 you added £1,000, then assuming a portfolio value of £103,000 on 31 Jan 2020, the return for the period 31 Dec 2019 to 31 Jan 2020 is:
(£103,000 - £100,000 - £1,000) / £100,000 = +2.00%
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(£103,000 - £100,000 - £1,000) / £100,000 = +2.00%
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Depending on how often you added/withdrew cash, you end up with a number of 'sub-period' returns during the year. Let's assume you added funds a further 3 times during the year (on 31 Mar, 30 Jun, 15 Sep) which resulted in the following sub-period returns:
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31 Dec 19 to 31 Jan 20 = +2.00% 31 Jan 20 to 31 Mar 20 = -10.00% 31 Mar 20 to 30 Jun 20 = +18.50% 30 Jun 20 to 15 Sep 20 = +5.75% 15 Sep 20 to 31 Dec 20 = +6.95%/6
Now for the maths. You get the portfolio return for the calendar year 2020 by compounding the above sub-period returns together as follows:
(1+0.02)*(1-0.1)*(1+0.185)*(1+0.0575)*(1+0.0695) - 1
= 23.03%
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(1+0.02)*(1-0.1)*(1+0.185)*(1+0.0575)*(1+0.0695) - 1
= 23.03%
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Of course, in practice this would all be made very simple by using a spreadsheet, with a new row added for each date on which you need to record the portfolio valuation, along with the funds added/withdrawn and the sub-period return calculation.
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I said before that this was the minimum needed. In addition to these dates, I personally also record the week end and month end valuations so that I can calculate my portfolio return over whatever period I want simply by compounding all the relevant sub-periods together.
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The other 'bolt on' to this is benchmarking. If for example you wish to benchmark your returns against an index, then for each valuation date simply add another couple of columns for the index amount and calculate its sub-period return as well.
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By doing this, you can then pick any starting point by which to compare your portfolio to your chosen benchmark, such as the one I posted a few weeks ago, shown here:
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The name for the above method of calculating returns is called the 'time-weighted return'. There are other methods which I won't go into here, but this is usually considered the standard method for equity portfolios.
I hope that helps anyone currently pondering the topic!
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I hope that helps anyone currently pondering the topic!
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