Understanding your rate of return (ROR) is critical to understand your portfolio performances. There are just too many ways to do math with stocks but there is only one way to truly calculate the performance of a portfolio.

I have never been happy with the ROR calculation of Quicken and always questioned the numbers. More importantly, how do you calculate the ROR with your shares re-invested? I am sure there is a *generally accepted accounting procedure* for the ROR and I know there is one from a tax perspective but I have decided to follow the following rules:

- It’s based on the money I invest and not the shares I purchase. That means the math starts counting once I transfer cash into the account and not when I buy a stock.
- It’s based on the value of the account including cash and not the value of the shares. It’s the final number at the bottom of your statement.
- Stock investments, mutual funds or even GICs are a mean to increase the overall value of the portfolio.

**Related:** How To Review Your Financial Plan

## BACK TO THE BASICS

### Assessing Your Profit

Let’s define how you assess your profit. I think it’s important to understand how to calculate your profit since it can be calculated differently and the total value of your portfolio takes into account your profit.

#### Profits with GIC

*profit = (principal + interest) – principal* where the principal is your initial amount and the interest is what you earn from your investments.

#### Profits with Stocks

*profit = (principal + capital gains) – principal *where the principal is your initial investment and the capital gains is the profit (or loss) from your investment. You capital gain is defined by the following formula: shares count * (market value – purchase price). If you sold the stock then it’s the sell price otherwise it’s a paper capital gain.

#### Profits with Dividend Stocks

*profit = (principal + capital gains + dividends) – principal*. The same definition as above apply with the addition of the dividends you have earned. The principal would be the initial share purchase times the purchase price and the capital gains would be calculated with the initial share count as well. The dividends would be from the dividends earned (even if they are re-invested).

* I kept this one for last as in a tax free account, the gains is simple but in a non-registered account you have to take into account the taxes you have to pay. I am however keeping it simple right now and disregarding the taxes.

## Simple Way To Calculate ROR

For the longest time, I thought I needed to track all my transactions to get an accurate picture and that’s a lot of work. Let’s just be realistic. With dividends coming in every month and some of them with a DRIP, the accounting of every transactions across multiple accounts become quite a chore. I already have to do that for tax purposes in non-registered accounts but it’s not something I want to do with all the accounts.

I needed to think about it differently and ignore the actual investments I have. It’s like a black box inside and I focus on the money I put in and how much it’s worth overall. Some of it is invested and some of it is in cash. All the matters are the following:

- When and how much is invested
- The total worth of the account

I decided to manage it by account but you could do it for your overall portfolio since you have the transactions for each account. The trick is simple as all you need to do is use the XIRR function of Excel or Google Spreadsheet. Let’s use the TFSA as an example since most will be familiar with the account. The total for the day is simply using today’s date and my total value of the account as a negative value. It has to be negative for the XIRR formula to work.

I basically have an annualized return of 15.88% in my TFSA account. The annualized return gives me a different perspective on my investment compared with the fact that I have a 57.09% profit on my investments. I hope to double it within 7 years and to do that I need at least 10% annually. If you withdraw from your TFSA, just enter is as a withdrawal with the appropriate transaction date and your annualized return will adjust accordingly. What I have done is track the amount of money I put in the account as opposed to the individual investments and it’s much simpler that way.

**Readers:** Are you tracking your ROR?

Image courtesy of cooldesign / FreeDigitalPhotos.net

I calculate my IRR this same way as well and I’m quite happy with where I’m at, after the recent increase in the markets. My only concern is trying to track it and compare it to a broad index, in my case the S&P 500. I know for most of us it’s all about the income stream, but I think it’s important to track with compared to an index that you would invest in as a an alternative. I’m fine with a little under-performance but if over a 5 year span I find that I’m well behind then it’s time to reconsider as I’m leaving too much money on the table. Although it’s much more intensive to keep track of and there’s plenty of sources for error. When I first did this exercise I was about on track with the markets, but that assumed that cash was immediately invested whereas cash in my accounts isn’t. Earlier this year I was holding $10-25k because I just didn’t see many opportunities.

I appreciate you sharing this method, I need to add it to my existing value calculations. I agree it’s a big hassle tracking every transaction, but so far I’m willing to do that with all my DRIP accounts to have an accurate ACB when I transfer in kind to my TFSA. My methods show me my yield on average cost (calculated based on my ACB/share) for each DRIP position, and my overall annual dividends and dividend growth, but I had not even sorted out how I would calculate total ROR. I like your simple method.

Though dividend taxes will make my totals a little inaccurate, I won’t hold DRIP holdings large enough for dividend taxes to make a measurable difference in long term total return so I’m not too worried about that.

@Erich

I am happy that you found it useful 🙂

It’s a lot of manual accounting that I decided not to include my DRIP transactions in my process. I am also not sure how it helps me understand the performance of my account as opposed to understand the performance of the investment. The investment is relatively easy to understand the performance since the data is all public. However, I do have the transactions as I enter them in Google Finance but it’s not in my spreadsheet.

What do you do with the yield on ACB?

I use my yield on ACB for DRIP holdings because for some companies I am likely only ever going to purchase via DRIP and SPP, so this will give me incentive to remain a buy-and-hold investor by seeing what my yield on cost becomes with future dividend growth. If you don’t keep track of your yield on cost for a given position, you are missing out on seeing how much % in dividends you are getting paid long-term for the money you spent long ago. this is particularly important for high dividend growth companies that start with lower dividend yields, I can see how they can surpass lower-growth high yield investments long term and be very happy I held those companies for so long.

I also use the internal rate of return function in Excel to evaluate my portfolio performance. I have one for each year since i took over from my financial adviser (Jan 2009), or should I say financial product salesman, one for the current year, one from inception (Jan 2009) til end of last month, and one for the TSX also since inception. This gives me a pretty good picture of how well I am doing.

Once set up this takes very little time to maintain, basically once a month I update the portfolio value (including cash holdings) and enter any debits and/or contributions.

One could also use the Compound Annual Growth Rate calculation, using the following formula:

CAGR=(B14/B7)^(1/(years))-1

CAGR 12.95%

Value

2007 5462.69

2008 4747.19

2009 6380.29

2010 7912.66

2011 8637.95

2012 9360.08

2013 11340.00

The above would works out to the 12.95% for six years(2008 to 2013)

I have been a dividend investor for umpteen years and I have structured my portfolio so that my return on investment is measured every time that I update market prices and cash on hand. To do this I have dividends paid in cash and I re-invest the cash as I see fit. I sometimes add and remove cash from the portfolio and this has to be accommodated in the calculations. I use a spreadsheet to monitor about 25 stocks and use its math capabilities to measure ROI. With my method it is necessary to pick a start date and measure everything from that date. In my case it is June 30, 2004. As of today, my annual average ROI has been 6.01%. Over the next 12 months my dividend return will average 5.69%. The return follows the tse index and I aim for 7.2% which doubles your money every 10 years. To calculate ROI use the formula Future Value= Present Value *(1+i)n and solve for i using built-in logs and antilogs. I believe this to be the most accurate method of measuring growth. I can provide more detail to those interested.

Excellent formula John Allan on ROI