In addition to blogging I have some other side projects. One of my side projects is the web site www.trustfundsforkids.com (I’m not really plugging anything because there are no advertisements on the site and it is a simple, single page site with down loadable schedules) which describes the process of setting up a trust fund and the performance of the three trust funds that I have set up (so far) for my nephews and nieces.
The three portfolios invest in stocks. Portfolio one has a market value of about $16,000, Portfolio two has a market value of about $8500, and Portfolio three has a market value of about $1500. The size of the portfolio is driven by how many years of contributions have been made (7, 4 and 1 respectively).
About half way down the page (or you can use this link and jump there) each of the three portfolios has a single page that summarizes the key information. I put these schedules together manually from a variety of sources and have refined it annually.
How to Organize Your Stock Portfolio
It is actually quite difficult to put together a simple, single page worksheet that tells you what you want to know about your portfolio. While investing firms are getting better and better each year in formatting information and adding new organizational layouts (and of course it is so much better to download forms rather than have reams of paper), they still don’t easily tell you what you want to know, which is why (for now) I am creating my own formats. Here is what is contained:
– For each security, the date of purchase (good for determining whether gains are long-term or short term), purchase price, adjusted purchase price (in case the stock splits), price paid, and the current “value” of the holdings which is based on today’s stock price (or whenever it was most recently updated)
– An “unrealized gain or loss” is determined for each stock, which is the amount that you’d make or lose if you sold today
– By each security I also show the CUMULATIVE dividends that stock has paid out since purchasing the stock; usually dividends go elsewhere on the statement but it is important to view dividends right next to the stock
– Since you have dividends then you can calculate the “total return” on the stock, which is the unrealized gain / loss plus cumulative dividends paid
– The total return is then impacted by the amount of time that you’ve held the stock; the % return is calculated as well as the annual return
– The estimated yield comes from your brokerage statement or you can find it at yahoo – it shows the percentage return that you would have if their dividend rate stays the same and the stock price doesn’t move during the next year; as the stock price rises the estimated yield goes down and as the stock price falls the estimated yield goes up. Companies also can raise or lower the dividend rate (expressed as an amount per share) although the dividend rate usually rises unless something catastrophic occurs because management hates to cut the dividend
– The dividend yield is important because bonds and other interest-bearing instruments are yielding less now (the Federal Reserve cut rates recently) so even 2-3% is a great return. In addition, the dividends are taxed at the lower rate of 15% while interest is taxed at ordinary income rates (generally 30% – 39%)
– Finally, each security has a little “notes” box which gives a brief statement about why the stock was picked and what some factors are that impact the stock. This box is still evolving but in general for each stock you should know WHY you picked it and have a plan for when you might sell it either because it hit your price goals or because it has fallen significantly
The above information is laid out in a succinct fashion but is relatively common. The rest of the document is more interesting:
– For each stock I sold, I have the date sold, the realized gain or loss that occurred when the sale happened, dividends paid, total return (per above), the year it occurred (for tax purposes), what it sold for, and what’s happened to it since. That last item, what’s happened to it since sale, is needed to see if, in hindsight, the decision to sell was a wise one. Over some period of time the information will be less relevant because stocks should be expected to rise some amount every year and every sale will seem to be a loser at some point (unless it ultimately went bust)
– I calculate total fees paid to date (buy & sell commissions plus any account fees) in order to determine the annual % and the cumulative costs. For this portfolio with individual stocks there are no “hidden” costs but for an account with ETF’s or mutual funds then you’d need to break that out as well (gets more complicated because it is embedded with performance, and for those advanced students out there I do realize that there is an implicit cost beyond the brokerage fees for buying and selling based on the liquidity of the market and the bid / ask spread)
– Your dollars that aren’t yet invested or your sales proceeds prior to being re-invested earn interest in the money market account that is “attached” to your brokerage account; you should show this interest earned in total (usually this isn’t a lot of money unless you don’t put your money to work in your brokerage account)
Then we get to the most important information, which is the comparison of the total dollars that you have put into this account compared with current value. For these funds I have a little graph that I pulled off my investment provider and pasted it into the document.
It is difficult to see this total investment (cash in) vs. today’s total value because your portfolio has a lot of moving parts. If you sell a stock and then reinvest the proceeds (including your gains), then your statement will often show the new stock at its cost and value and you can’t see the “cause” of your gains and losses. In portfolio one, for instance, most of the gains have come from a few big stocks, particular Amazon which we bought at 14 and sold in a couple of parts at 90, China Mobile (which tripled while we owned it), and then we had a number of other wins plus some steady price appreciation and paid dividends (from companies like electric utilities such as AEP).
The “cash invested” compared against current value is a much better determination of how you are doing than rate of return, although surely that is a valuable measure, as well. The rate of return may or may not include dividends, and it won’t include those items which you sold off earlier (but made up your previous return). In addition, rate of return can be impacted by the amount of cash that you have in your funds; if you have limited investments but do well originally and then put in a lot more cash and do poorly, your rate of return will be more favorable than reality. This situation is unfortunately very common; funds or stock pickers do well with small amounts of money, then people “pile in” with new money, and the rate of return isn’t weighted to show that the fund was doing fine with a little bit of money and then doing poorly with large amounts of money. This situation is also called “chasing performance” and is the cause of many investing woes.
In order to do a “real” return calculations you need to view the timing of your cash inflows against your current value; then in excel or in any other widely available spreadsheet tool you can have the system calculate your return taking into account when you put in money. For example, if you put a lot of money into your fund right before the end of the reporting period, that money will skew your results (make your performance look better or worse) depending on the trend.
Based on the “cash in” and current value model, you can calculate the total gain or loss since portfolio inception. This view isn’t new… in fact I stole it from one of my investment providers. However, it is becoming more widely used. This view gets more complicated as you move funds in and out of the portfolio; those transfers out need to be weighed appropriately so as not to skew performance.
In order to create such a model, it takes some painstaking detective work. You need to sort out your dividends by stock, and determine the interest income as well as the value of the buys and sells. You will also need to break out your commissions separately and dig through all the little transactions to see if there are fees coming out of your accounts. It is very helpful to go through this effort, however, because you will learn a lot about the timing on dividends, odd charges, how dividends were calculated, whether or not your sales occurred at one price or multiple prices, etc..
I recommend spending some time looking at your portfolio in detail. It will help you to understand your investments, the impact of dividends, expenses, and sales, and how you are doing overall. Best of luck.
Cross posted at LITGM