Articles Comments

My Financial Independence Journey » Investment portfolio » Revisiting Tracking Portfolio Returns

Revisiting Tracking Portfolio Returns

1388612_market_movements_2Up to this point, I’ve written two articles detailing systems for tracking my portfolio’s returns and comparing them to the S&P500.  Both of these systems had strengths and flaws.  Some great feedback from commenters on the previous articles prompted me to go back, combine the best features of both systems and create what is probably the best and most accurate way to track investment returns and gauge my performance against an index.

Before we get to the new method, let’s talk about some history.

The first method that I employed was rather cumbersome.  Every time I bought a stock, I would hypothetically purchase an equivalent amount of the S&P500 as measured by SPY (an S&P500 ETF) on the same day.  Comparing the rise in my portfolio value to the rise in the value of my hypothetical investment in SPY would allow me gauge my performance.

While I liked the idea behind this system, it had a few flaws.  First, I didn’t include my high yield portfolio or the cash that was locked up due the sale of put options.  This was just a minor problem that could have been corrected with a few more lines on my spreadsheet.

But the major problem with this method was that it simply tallied up and compared all invested money, it didn’t pay attention only to cash flows.  By all invested money, I mean all money that I transferred into the account (cash flows), dividends received, and options premiums received.  So while it charted the growth of my dividend portfolio accurately, it didn’t accurately chart the S&P500 comparison because it included capital (from dividends and options) that wouldn’t otherwise have been there if I had really been investing in SPY.

That brings us to the second method, which focused exclusively on cash flows.  This method proved to be a far superior measure of the performance of my investment account.  All I needed to know was the starting balance, the dates and amounts of all cash flows into and out of the account, and the ending balance.  It was completely agnostic to whether the account was filled with stocks, options, cash, or Beanie Babies.  However, for a comparison I simply looked at the returns of the S&P500 over time.  This makes sense if you invest a lump sum once, however if you invest additional capital at various points over time, this isn’t nearly as good a comparator.

It turns out that if you put the two methods together, you get something really powerful and probably quite accurate.  Although slightly time consuming to build.


The New Method

  1. Know your starting balance, cash flows, and ending balance.  Assemble this using the XIRR function in Excel or your favorite spreadsheet.  I’m not going to cover how to set up XIRR here since I’ve already done that in a previous post (go read that if you haven’t already).
  2. The same starting balance, cash flows, and dates will be used to build the S&P500 comparator.  The method is conceptually simple, but a little bit of a pain to build.  Every time you add money to your investment account, you hypothetically buy an equivalent amount of SPY on the same date.  For example, if I add $1,500 to my account on November 12th, I look up the price of SPY on Nov 12th and buy $1,500 worth of it.  You’ll likely wind up with fractional shares which you wouldn’t be able to buy in real life, but use them anyway as it makes the math and your life a bit easier.
  3. After you’ve determined how many shares your starting balance and each cash flow is worth, it’s time to reinvest dividends.  To do this, you need to know how many SPY shares you owned on the day before the ex-div date.  You can then multiply that number of shares by the dividend payout to see how much cash would have been generated.  Then on the dividend payment date, you figure out how many shares that cash would have allowed you to purchase.
  4. Add up all the hypothetical SPY shares that you own.
  5. Look up the value of SPY on the same date as your ending balance and use that to determine the ending balance of your hypothetical SPY comparison portfolio.
  6. Use the XIRR function on your hypothetical SPY portfolio and compare the annualized gains to those produced by your real life portfolio.


The Results

Overall, the results are not that different from either of the two methods I described above.  I’m still beating the S&P500 by about 5%.

The year by year breakdown is as follows:

  • 2010 (May-Dec) - Me 20.29%; S&P500 7.63%
  • 2011 - Me 15.96%; S&P500 0.98%
  • 2012 - Me 11.52%; S&P500 13.18%
  • 2013 (Jan-June) - Me: 31.35%; S&P500 28.79%
  • Total (May 2010-June 2013) - Me 17.6%; S&P500 13.1%


Because I have a pathologic obsession with charts, I made the following one to illustrate my investment performance over the last 38 months.

Performance tracking June 2013


In the chart above, the blue line represents my actual account value.  The red line represents how much my account would have been worth had I invested in the S&P500.  The green line represents the total amount of money that I deposited into the account.


But What About Risk?

I fully expect someone to pop up and say that if I’m beating the S&P500 I must be adding risk to my portfolio. Well, my portfolio has a weighted Beta of 0.93, which is less than the S&P500′s Beta of 1.  What that means is that my portfolio is actually less risky than the S&P500.

Note: I didn’t include my puts in the weighted beta calculation as I wasn’t sure of the best way to include them.  So if you like you can up my beta.  Worst case scenario, my portfolio is probably just as risky as the S&P500.

So to recap, that’s greater returns than the S&P500 with less risk.

What I hope that you take away from this is that yes you can beat the market if you focus on value, have a plan, and execute it.  I am not a super investor.  I’m self taught all the way.  There are still tons of holes in my knowledge base and I’m learning more every day.  It really just comes down to putting in the time and effort to find value rather than chasing the next big thing.

Written by

Filed under: Investment portfolio · Tags:

5 Responses to "Revisiting Tracking Portfolio Returns"

  1. That’s how I first went about comparing my returns to the SPY. I’m working on compiling the data for my actual purchases rather than the cash flows into my account to better reflect the time the capital was actually put to work. I’ve been using the adj. close prices which adjusts for dividends received but not as if they were reinvested. Over all of my current positions in my FI portfolio I’m up by 3.5% over investing in the SPY. Although that’s assuming no commissions on the SPY purchases so that’s probably a wash between not reinvesting dividends and excluding commissions. I’m happy with a 3.5% outperformance. I might have to go and revisit my first return calculations to make my own fancy pants charts.

    1. MFIJ says:

      3.5% over performance isn’t bad, especially since the world of dividend growth investing isn’t really know for being high risk / high return. My overall performance seems to fluctuate by up to a percent either way depending on the month. It will be interesting to see if it holds up over the next 3 years or if it eventually drops to approximate the S&P500.

  2. Awesome overview and method on comparing gains to the S&P 500. I always struggle on that comparison, so this will help a lot. It looks like you’ve found a great strategy, keep it up!

    1. MFIJ says:

      Thanks. The comparison was a bit difficult to set up, but shouldn’t be very hard to keep up.

      And time will tell if my strategy is good or not. Three years isn’t that much time in the market. We’ll have to wait and see how I’m doing at the 5 and 10 year mark.

  3. [...] 8. Revisiting Tracking Portfolio Returns @ My FI Journey. [...]

Leave a Reply


You may use these HTML tags and attributes: