Every month I report on the performance of my personal portfolio to record the highs and lows of my journey to turn £4k into £1,024,867. A process that ‘should’ take me around 20 years to achieve based on my expected yearly return, my expected dividend yield per year and the amount of capital I expect to deposit into new positions each month along the way.
Having reported on my stock portfolio results this month I was asked by a member how to calculate your stock portfolio investment returns.
The truth is, there are a number of different ways to do this, all yielding variable results depending on the method. However, personally speaking, I prefer to keep things as simple as possible and consistent.
Consistency is of course key if you want to compare current results to previous results. Simplicity is a personal preference.
Some investors love to over-complicate things in the pursuit of more detailed data. But, in my experience, this extra data often fails to deliver much of value. The consistency of approach is most important.
Take weight loss and dieting as an example. You could measure your macros, go super detailed on protein intake and use smart scales to measure your bone density changes. You could estimate your water retention ratios and all sorts. But you will do just fine recording your calorie intake, calorie burn rate and weight. And provided you use the same scales, and the same methods of calorie counting over the course of the journey, you’ll get an accurate enough measure of your performance and progress.
So I assume a similar mindset to my investing.
This is great news for beginners also, because everything I am about to show you is simple to apply to your own stock investment portfolio.
How to Calculate Monthly Return
I start by identifying the portfolio value that I closed the previous month at. This is my starting point. Let’s say this is £23, 456. I then take the amount I finished the current month with, let’s say £24,567, and calculate the difference. In this scenario we get £1,111.
However, I also want to take into account any deposits I’ve made that month that might be bolstering that figure. You see, if i’ve pumped £250 into the account that month then I can’t say that the £1,111 was made solely from the stocks in my portfolio. It wasn’t, the £250 I pumped in has contributed. And so, I will always subtract the deposits made.
As a result, i’m left with a return of £861 in this scenario. £861 achieved from the changes in share prices for my stocks over the month.
To work this out as a percentage is simple. 100 / STARTING FIGURE * RETURN is the sum. In the above scenario it would be 100 / 23,456 * 861 = 3.67. Or 3.67%.
Some investors ask, do you include income from dividends in your return calculations. Personally speaking, yes I do. It is already factored in to the above calculation.
If I have been paid a dividend that month, that money typically goes into my ‘cash’ pot in my Stocks & Shares ISA. It therefore contributes to the amount I finished with in the current month. Whilst this increase in value comes from the dividend, not a rise in share price, it is still a ‘return’ for me that came from the ownership of the stock that paid it out.
Again, some investors may want to over-complicate matters by wanting to know the % return achieved solely from share price changes, and also a separate figure for returns from dividends. I, however, do not need this.
I keep a simple tally of my dividends received and total them up at the end of the year to work out how much I made in dividends. Historically, this tends to work out at about 4% of the figure I started the year with. But of course can differ for each investor.
How to Calculate Yearly Return
This is done in precisely the same way, only with different parameters. The main difference is my starting figure is the figure I ended the previous year with and the deductions for what i’ve personally deposited is based on what i’ve put in throughout the whole year. The calculation, however, is the same.
How to Calculate Individual Stock Returns
I only calculate ‘all-time’ returns on my individual stocks. I don’t need to know what each stock gained or lost in % value in each month. It’s unnecessary information that I’m never going to do much with.
When calculating the return % of each individual stock you own have the added complication of the fact that you may be adding to that stock over time.
Again, I am a keen believer in simplicity. Many investors will want deeper level data, but I’ve never deemed it necessary for my needs.
My calculation is therefore based on the total COST of the total shares you own in that stock, which is then calculated against the MARKET VALUE of those shares at whatever time parameter you are looking for.
For example, imagine you have 1000 shares in XYZ stock costing you £3.30 per share. So that’s a total cost value of £3300. If I wanted to know the % return for those shares at the end of March for instance, I would find out what they were worth after the last trading day of that month, and work out the current market value. Let’s say for this example that is £3.50 per share, so £3500.
I would then simply take the difference of £200 and use the following calculation of 100 / COST VALUE * DIFFERENCE. Or in other words, 100 / £3300 * £200 = 6.1%.
If the next month you have at some point added to that position and bought more shares then this will in turn have increased the cost value, and the market value. So you simply need to run the same calculation over the next date parameters you are looking for. Whatever that may be.
The obvious consideration here is that ‘adding’ to a position at higher prices and increasing the number of shares you own can inevitably have a reductive effect on the percentage of return achieved. For instance, you may have bought 50 more shares at £3.50 per share. Bringing your cost value to £3475. If the shares are still worth £3.50 per share and you own 1050 then the market value is £3675. The difference is still £200, but the % return will be reduced.
100 / £3475 * £200 = 5.75%
Whilst this might seem complicated, it’s not. All brokers should show your total cost value on your portfolio per stock you own. So you won’t need to calculate this. It’s done for you. Equally, in my experience, all brokers will also show your current market value of those shares as well.
There may be a time, however, when you want to work out the market value on a set date. At which point the live market value of the shares isn’t of much use. However, fear not, because all you need to do is find out what the share price was on the date in question and multiply this by the number of shares you own. This will give you the market value of those shares on that date.
The important thing to take away is simply that as you add more shares to the position at higher prices, you are slowly reducing your percentage of return on that stock, despite the fact that you’ve not made or lost any actual financial value on it.
These methods of calculating returns can be found in action in my Monthly Performance Reports and have served me adequately over the years. Again, whilst I acknowledge there are more complicated methods that can be applied to calculating investment returns, I’ve never needed them. For me, the key is consistency. As long as you are comparing like for like, it shouldn’t matter.