Measuring Performance Results

Clubhouse, by Ken Kavula, Subscriber


Posted on July 1st, 2015


Keeping track of your relative return keeps you focused on success. It allows you to assess your performance in a relatively straight-forward, accurate way using a value that we can depend on for accuracy.

*The Clubhouse is for sharing features and tips & tricks … based on your feedback and favorite resources. It’s also about tackling your questions and topics of interest. *

When we talk about long-term returns, Manifest Investing likes to speak in terms of relative return. In its simplest form, relative return is a measure of how much a particular stock has appreciated when compared to a chosen benchmark. Usually this benchmark is a mutual fund that mimics a widely followed stock index like the S&P 500 (VFINX) or a fund that tracks the entire stock market (VTSMX).

The calculation for a single stock purchased on a particular day is pretty straight-forward. Let’s say you bought 50 shares of Apple stock representing an investment of $5,391.50. Choose your benchmark and find out how many shares of this fund you could buy for the exact same amount of money on the same day you bought the Apple stock. To keep it simple, use end-of-day prices. Now, fast-forward to today’s date and find out how much your Apple stock is worth and how much your holding in the benchmark fund is worth.

MoneyChimp.com Calculator. I would have labeled the first two boxes: Original Value and Today’s Value.

If you have a business background or a good working knowledge of Excel, you can quickly convert the dollar amounts to growth percentages. If not, use a compound growth calculator which can be found on the internet. I’m showing one from moneychimp.com in the accompanying figure.

All you need to do is fill in the dollar amounts for Apple along with how many years you’ve held it. Remember, present would represent the original value and future would represent the value today. If it’s not an even number of years, use a fraction like 270/365 (days) or 15/12 (months) to approximate the time. Hit calculate and jot down the answer. Do the same for your benchmark, using the original dollar value as the original value and the current dollar value as the future value. Keep the time interval the same as you used for the Apple stock, hit calculate and jot down the value.

You now need to compare the two values.

Let’s say, for example, that the Apple calculation gave a value of 27.6% and the index fund value was 19.2%. You can conclude that during this particular time period, Apple had a relative return that was a positive 8.4% (27.6-19.2). In other words, our position in Apple exceeded our stated goal during this time period of beating the market by at least 5%.

It quickly becomes more complicated if you have purchased several lots of the same stock over a number of years. You’ll have to do a separate calculation for each lot and then average the relative returns to come up with a single value for the holding. (Or compare internal rates of return — accounting for the cash flows, slightly more complicated … but the most accurate metric.)

Luckily, these are software packages for keeping track of your personal portfolio. A particularly good choice is sold by QuantIX software. Matt Willms and his brother have created an excellent portfolio management program which I have used for over 20 years to keep track of things like relative return. I can tell you from experience that my accountant loves the reports that can be generated from this software around tax time.

For more, visit: http://quantixsoftware.com/company_profile.html

If you’re a member of an investment club, your ability to calculate a relative rate of return for your club portfolio is built into your accounting software. My clubs use bivio software and under the Reports Tab I find a Benchmark report as shown in the accompanying figure.

When I press Generate, I get the report shown here:

In this example, we’re using the S&P 500 (VFINX) as a benchmark and we’re looking for returns that span the entire history of the club. The benchmark can be changed, if desired, as well as the date range. Remember that returns over time periods of less than a year are probably not as reliable as long-term returns. The 3% relative return for this model club is quite good, considering it’s a measure of the annualized return over more than 12 years.

The portfolio’s return is calculated by creating a table that mimics every single financial transaction of the club, as shown in the accompanying transaction log. Every time the club buys something or receives money from a partner, the computer makes a buy from the index fund and every time the club sells something or cashes out a partner, the computer sells an equal dollar value from the fund. It’s all imaginary money of course but the computer can compare the dollar amount in the benchmark fund to the dollar amount held by the club and quickly convert both values to growth values.

Your only job is to compare the two growth values that are displayed and make a simple subtraction. If your IRR, which stands for internal rate of return, is significantly below the IRR for your chosen benchmark, it points to problems the club may be having. Again, our stated goal is to beat the market by 5% over time. It’s an ambitious goal but it keeps the club working hard, trying to meet or surpass the 5% value.

A similar report can be generated using the accounting software from other club accounting software providers.

Keeping track of your relative return keeps you focused on success. It allows you to assess your performance in a relatively straight-forward, accurate way using a value that we can depend on for accuracy.

Let me know what else you’d like us to cover. Enjoy the rest of your summer.

Ken kavula

Ken Kavula

Ken Kavula is a retired educator and successful long-term investor. Ken has served in a number of leadership positions for the National Association of Investors and is active in four investment clubs. Welcome to the Clubhouse. Subscribers are invited to share their favorite experiences, suggest best practices and most importantly, let us know “What’s on your mind?” What topics and questions do you have? We all get better when we do this together. Email Ken at kkavula1@comcast.net.

Expected Returns, Jul 2015

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