How to Estimate Your Portfolio Performance
When it comes to your investments, do you know what your return is? Many people rely on the annual return of the mutual fund itself, assuming this is their return as well. But this is not the case. Your individual return varies based on when you bought the investment as well as if you have added any new money or removed any money. So how can you estimate your portfolio performance quickly and easily?
I am going to show you how to do this. Yes, there is math involved but it is basic math and there are only a few steps so it shouldn’t be too much trouble to estimate your portfolio performance. Having a calculator handy will make the math a breeze. Let’s get started.
Estimate Your Portfolio Performance: No New Additions
This is the easiest option and can be done rather quickly. It assumes you invested a set amount of money during the time you’ve held the investment and have not added any more money or removed any money. All you need to know is the amount you invested and the value of your investment today. Simply take your ending value and divide it by the beginning amount. From there, you subtract by 1 and then multiple by 100 and add a percentage sign.
Here is how this would look. Let’s say you invested $5,000 and it is now worth $8,000. You would take $8,000 divided by $5,000 to get 1.6. You would then subtract the one, arriving at 0.6. Now we multiply by 100 and add a percent sign to get 60%.
But what happens if you invested $5,000 and it is now worth $4,700? You would still take the ending number ($4,700) and divide by $5,000 to get 0.94. Then subtract one which gets you to a negative 0.06. Multiply by 100 and add a percent sign and you will see you lost 6%.
See, that math wasn’t so bad. But what if you added money to your investment or took money out? That takes us to the second way to estimate your portfolio performance.
Estimate Your Portfolio Performance: With Additions or Withdrawals
Let’s say you ended up investing some more money into your fund during the year. If you use the calculation I presented above, you are going to get an answer but it will be wrong. It will overestimate a return if you added money. This is because it will assume your investment earned the difference between the starting balance and ending balance. It is not taking into account that you actually put more money into the investment. So how do we account for this?
In this case, the math is still basic, but it is a tad more involved. First you take the ending value and subtract out half of your additional investments. Next, divide that answer from the beginning value plus half of the additional investments. Subtract one from the answer, multiply by 100 and add a percent sign to get your return. Let’s look at an example do make this more clear.
We originally invested $5,000 and during the year made two more investments of $300 and $200. At the end of the year, our investment is worth $6,100.
We first take the ending amount, $6,100 and subtract out half of the additional investments. Our total investments were $500 so we take half of this number. So $6,100 minus $250 gets us $5,850. Next we take our beginning balance ($5,000) and add half of the additional investments, $250 which ends up being $5,250. We then take $5,850 and divide by $5,250 to end up with 1.114. Subtract the one (0.114) and multiply by 100 and add the percent sign. Our return was 11.4%.
If you have a handful of additional investments over the course of the year, it might be wise to first total all of these up and then divide in half to get the number you will add and subtract to your beginning and ending balances. This will help you to not get lost in the math as you are trying to perform the calculation.
If you have taken money out of your portfolio during the year, the process is the same as outlined above. The only difference is that your ending number could end up as a negative return given how the market performed for the year even if your ending value is higher than your beginning value.
Caveats To These Calculations
There are two notes that need to be understood about using these calculations. First, you have to remember that they are just estimates. They are not going to be 100% right. While they are technically wrong, they are in the ballpark of what your return is, so they are a great, fast way to get a general idea of how well your portfolio is performing.
The second caveat is just as important to understand. These calculations are only good for one year periods. If you want to know what you performance has been for the last 5 or 10 years, you can’t use this calculation because it not taking into account other factors at play. While you can still use the calculation for a 2 year holding period, your estimate will be a large variance and this variance will grow as you estimate longer time periods.
Your best option to estimate your portfolio performance over longer periods of time is to find an online tool like Morningstar or to use a software program like Quicken. These programs can do the more complex math that is involved when trying to calculate your performance over time. Plus these programs won’t estimate your return, the return they do give you will be accurate.
When it comes to figuring out your portfolio performance, you can do a quick and easy estimate using the calculations above. They will give you a good idea of how well (or poor) your investments are doing over the short term. But for understanding how you are performing over the long term, your best option is to use a piece of software that can take into account all of the additional factors that determine what your investments earned.
How should one account for income taxes? I am in the 28% Federal and 9% State brackets, so taxes greatly impact my returns. Taxes are paid yearly on reinvested dividends and capital gains, while capital gains taxes are also paid on sale proceeds.