Investoid

A lot of the bloggers on my blogroll post periodic (or quasi-periodic) updates on their networth. Typically the networth calculations is straightforward:

Personal Assets - Liabilities = Networth

Assets would include investments, cash, homes, cars, and other long term assets. Liabilities would be things like credit card debt, mortgages, car loans, etc. The Middle Class Millionaire has decided to calculate his networth differently. His calculations produces some interesting results (see his post and the subsequent discussion).

I think it’s great that these people are focused on increasing their portfolio size to reach their investment and life goals, and that they are measuring their current status to ensure they are on track. However, from an investment perspective most of them do not seem to be keeping solid track of their investment returns versus overall portfolio growth.

What’s the difference? Investment returns are increases in the portfolio size due to higher asset prices or returns on investment (ie. dividends or other distributions). They ignore cash infusions and disbursements, to provide an accurate measurement of an asset’s return. Typically, the holding period return formula is used.

Why does this matter? After all, most people will evaluate the performance of their individual stocks or funds a fair bit, particularly in relation to their initial purchase price. But it’s important to measure your portfolio’s performance over time, not just at an individual asset but at an aggregate level. Also, you will be measuring the performance of your assets from the same point in time, rather than from the time of purchase. This is helpful when analyzing asset allocation as well as diversification. Furthermore, people who are saving for retirement may get a slightly skewed view of how their assets are doing if they look at how much their portfolio is growing in total size, but ignore the holding period return.

I think some people tend to avoid doing this because it can get a little complicated. You need to track what happens each time you buy and sell an asset, and account for the changes over each interval. It becomes especially tricky if you want to evaluate holding period returns at an arbitrary granularity - say analyze your monthly returns then roll that up into quarterly or semi-annual returns.

Nonetheless, I think it’s worth putting the time into ensuring that your portfolio is on track investment wise. I’ve looked at using a portfolio management software program like this for my own bookkeeping. If anyone has experience with a good - and preferably cheap or free - software (online or offline) system that allows you to input transactions and then calculate arbitrary time-period returns, let me know.