How I measure my portfolio performance
I know you've been struggling with calculating your portfolio performance. I‘ve been there too. In this article, I am going to show you how I personally calculate my portfolio performance, both monthly and yearly.
Disclaimer: I am not a financial advisor, nor a professional investor. I only want to show you my tips from my own experience and my plan is to entertain anyone who is passionate about investing. Don’t trust non-professionals on the internet. Stay safe!
Introduction
The way I calculate my performance is not the official one that is used by institutional investors. There is actually a bunch of ways to estimate your performance, but I will not mention them in this article. I will try to keep it simple and minimal. Let me know, however, if you ‘re interested in a detailed description of all the methods in another article.
What you will need:
- Portfolio value at the end of the period.
- Portfolio value at the beginning of the period.
- Amount of inflows (deposits) that will be subtracted.
- Amount of outflows (withdrawals) that will be added.
- Average portfolio value between end and beginning period.
Personal Example (August 2022)
In August, my portfolio returned -3.3%. That’s right, I lost 3.3% of my portfolio value in August.
How did I come up with this number?
Well, it’s very simple. On August 1st, my portfolio value was 65,066.9€. On August 31st, my portfolio value was 63,064.6€. Thus, if you divide the final value with the initial value and subtract 1, you get:
63,064.6 / 65,066.9 -1=0.03, or -3%.
Hang on, I said -3.3%, not -3%.
Why isn’t the previous calculation precise?
Error no.1: Well, I forgot to mention that I added 60€ to my portfolio in August and I used it to buy more assets. This is an inflow to my portfolio, so I need to subtract it from my final value. The reason behind it, is that I didn’t earn that money. I just added it from my personal account to my portfolio. Let’s calculate again:
(63,064.6 – 60) / 65,066.9 -1=0.032, or -3.2%.
It’s frustrating, isn’t it? Why did I say -3.3?
Error no.2 (this is tricky): Although it doesn’t seem straight-forward, I want you to wonder: is it the same if you add 60€ to your portfolio on August 1st and if you add it on August 31st ? Well, no… It is different and the reason is that every deposit (inflow) or withdrawal (outflow), must be calculated with a bias, depending on how many days of the month this transaction is part of your investment. I know it’s tricky, but let’s assume that my 60€ have been actively “working” for my portfolio for 30 days. Well, it’s not the same as working for only 1 day.
Example: Let’s say I decide to add 60€ on Aug 1st, in a stock that is priced at 10€. My best friend decides to add 60€ on Aug 30th when the stock is still priced at €10€. Suddenly, the stock goes up 10% on Aug 31st. That’s perfect! We both made 10%, right? Well yes! But my friend was capable of achieving the same result in 1 day, when I needed 30 days to get this 10%.
That’s why we need to find a way to take into account this investment period. It’s simple! I keep my daily portfolio value in a spreadsheet. Then I calculate the average portfolio value between the initial date and the final date.
Final calculation & formula:
Let’s calculate the final return in my example. I estimated my average portfolio value from Aug 1st to Aug 31st to be 62,444.3€. To calculate my performance, I will follow this simple mathematical formula:
(Final Value -Initial Value -Inflows+Outflows)/Average Portfolio Value
So:
(63,064.6 - 65,066.9 - 60 + 0)/62,444.3 = -3.3%
Conclusion
In this article I show you how I calculate my portfolio performance. I repeat, there are multiple ways to calculate returns. However, I personally find this way to be the easiest and the most accurate for every-day investors. If you would like to see the various ways that exist and the official methods that are used by institutions, please let me know.
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