Jump to navigation
# take a break

## Pretty Good Year

## Filler Post

## Measuring Return - Part 3

## Measuring Return - Part 2

## Measuring Return - Part 1

Well here we are at the end of another year. From a personal finance perspective for us it was a very, very good year. Our combined net worth increase about 35% from a year ago, better than the 30% increase in 2005. Our total debts (including mortgage) shrank by about 25% which is pretty much in line with our plan to be mortgage free in four years.

Our combined portfolio value increased a little more than 20% on an absolute basis ( (total ending value - total starting value - deposits)/total starting value) and on an internal rate of return basis increased around 15%, just barely beating the TSX. Our income from investments increased 220% over 2005 and my plan is to increase that around 60% over 2007.

Our top performer for the year was a mutual fund, the AGF Precious Metals fund which increased a whopping 63% over the year. We originally bought that fund in February 2003 for $8.79/unit. It closed yesterday at $26.75/unit, a total gain of 204% over almost 4 years. Our second best performer was another mutual fund, the Sprott Canadian Equity fund which after a slightly disappointing 2005 had a very nice 38% return in 2006. My best trade of the year has to be buying Canadian Oil Sands Trust on November 1, the day after the Conservatives decided to trash trusts. I was able to pick up shares of COS.UN for $24.50 on that day (the low of the day was $24.32) and they closed the year at $32.61, a 33% gain in just two months.

So it was a very nice year from a personal finance perspective. Over the next week or so I want to take a look at our spending and see how that compared to previous years as well as set up some investing, personal finance and personal goals (not resolutions) for 2007.

Our combined portfolio value increased a little more than 20% on an absolute basis ( (total ending value - total starting value - deposits)/total starting value) and on an internal rate of return basis increased around 15%, just barely beating the TSX. Our income from investments increased 220% over 2005 and my plan is to increase that around 60% over 2007.

Our top performer for the year was a mutual fund, the AGF Precious Metals fund which increased a whopping 63% over the year. We originally bought that fund in February 2003 for $8.79/unit. It closed yesterday at $26.75/unit, a total gain of 204% over almost 4 years. Our second best performer was another mutual fund, the Sprott Canadian Equity fund which after a slightly disappointing 2005 had a very nice 38% return in 2006. My best trade of the year has to be buying Canadian Oil Sands Trust on November 1, the day after the Conservatives decided to trash trusts. I was able to pick up shares of COS.UN for $24.50 on that day (the low of the day was $24.32) and they closed the year at $32.61, a 33% gain in just two months.

So it was a very nice year from a personal finance perspective. Over the next week or so I want to take a look at our spending and see how that compared to previous years as well as set up some investing, personal finance and personal goals (not resolutions) for 2007.

category: Personal Finance
posted on Saturday December 30, 2006 at 11:57:25
by: 0xCC

Wow, how did it get to be the December 22nd already?

Things are quite busy and I was hoping to make a 'real' post today but it looks like that might not happen. Maybe later tonight but I have a few things to plow through before I can take the time to post. At least my Christmas shopping is finished but I still have to do the extra stuff like do some grocery shopping and get the gifts wrapped and packed up for the 100km car trip to our family's places.

Anyway, I wish everyone happy holidays and hopefully I will post something more substantial before next Saturday...

Things are quite busy and I was hoping to make a 'real' post today but it looks like that might not happen. Maybe later tonight but I have a few things to plow through before I can take the time to post. At least my Christmas shopping is finished but I still have to do the extra stuff like do some grocery shopping and get the gifts wrapped and packed up for the 100km car trip to our family's places.

Anyway, I wish everyone happy holidays and hopefully I will post something more substantial before next Saturday...

This last way that I use to measure return is a little bit of a strange one and it takes a little bit to wrap your head around. I don't know what to call this. "Invested Return"? I don't know. You can think of this as the way that returns for a mutual fund are measured. It removes the time component but allows for accounting for additional cash added to the account.

To calculate this return you need to treat your portfolio like a mutual fund. When some one buys units of a mutual funds, there isn't necessarily some one selling units on the other side of that transaction (although there could be). So mutual fund unit prices are not determined by supply and demand but by the value of the investments the mutual fund owns divided by the total number of outstanding units of the mutual fund. When some one buys units of a mutual funds more units of the mutual fund are called into being out of thin air and added to the outstanding units of the mutual fund. Conversely, when some one sell out of a mutual fund, the units cease to exist.

Let's look at an example. Let's say that you have $1000 in investments and you want to start tracking your return the same way a mutual fund would. You first need to just pick a number of initial units you want to have for your portfolio. This number can be anything and it doesn't really matter what it is because it will change as you add and take away cash. So for our example let's use 1000 as the initial number of units. So each unit is initially worth $1.

Now let's say that over the course of a year there isn't any extra cash added to the portfolio and the total value of the portfolio goes up to $1100. Since there are still 1000 units each unit is now worth $1.10 or 10% higher than when we first started calculating unit prices. Now let's say that we have another $100 to add to our portfolio. Since units have a value of $1.10 we can 'buy' 90.909 units, bringing our total units to 1090.909 and the per unit value is $1.10 (after a small amount of rounding, $1.10 = ($1100 + $100)/(1000 + 90.909) ).

So lets say that another year goes by and we had a very, very good year and were able to increase the total portfolio value to $1500. Now we still have 1090.909 units and the per unit value is $1500/1090.909 or $1.375 which is a 25% return ( (1.375-1.10)/1.10).

The example I used here doesn't really illustrate very well how this method of calculating return differs from the other two so I think I'm going to have to come up with an example (in another post) that will show a side-by-side comparison of the three methods. Hey, maybe I will use Google Spreadsheets to illustrate the point (which I have been meaning to use for a little while as a test to see how the new features of Google Docs works).

To calculate this return you need to treat your portfolio like a mutual fund. When some one buys units of a mutual funds, there isn't necessarily some one selling units on the other side of that transaction (although there could be). So mutual fund unit prices are not determined by supply and demand but by the value of the investments the mutual fund owns divided by the total number of outstanding units of the mutual fund. When some one buys units of a mutual funds more units of the mutual fund are called into being out of thin air and added to the outstanding units of the mutual fund. Conversely, when some one sell out of a mutual fund, the units cease to exist.

Let's look at an example. Let's say that you have $1000 in investments and you want to start tracking your return the same way a mutual fund would. You first need to just pick a number of initial units you want to have for your portfolio. This number can be anything and it doesn't really matter what it is because it will change as you add and take away cash. So for our example let's use 1000 as the initial number of units. So each unit is initially worth $1.

Now let's say that over the course of a year there isn't any extra cash added to the portfolio and the total value of the portfolio goes up to $1100. Since there are still 1000 units each unit is now worth $1.10 or 10% higher than when we first started calculating unit prices. Now let's say that we have another $100 to add to our portfolio. Since units have a value of $1.10 we can 'buy' 90.909 units, bringing our total units to 1090.909 and the per unit value is $1.10 (after a small amount of rounding, $1.10 = ($1100 + $100)/(1000 + 90.909) ).

So lets say that another year goes by and we had a very, very good year and were able to increase the total portfolio value to $1500. Now we still have 1090.909 units and the per unit value is $1500/1090.909 or $1.375 which is a 25% return ( (1.375-1.10)/1.10).

The example I used here doesn't really illustrate very well how this method of calculating return differs from the other two so I think I'm going to have to come up with an example (in another post) that will show a side-by-side comparison of the three methods. Hey, maybe I will use Google Spreadsheets to illustrate the point (which I have been meaning to use for a little while as a test to see how the new features of Google Docs works).

category: Personal Finance
posted on Saturday December 16, 2006 at 09:03:00
by: 0xCC

As I mentioned in my previous post there are three ways that I use to measure the return of my portfolio. I've already covered the most basic way, what I called absolute return. Now I want to take a look at Internal Rate of Return, or IRR.

Internal rate of return (available as a formula in most spreadsheets) accounts for each contribution of additional funds to the portfolio. It also an annualized rate of return. So if you have $100 at the beginning of the year and that $100 grows to $103 after 6 months and you add $100 the total value would be $203 and the 'absolute return' I talked about last time would say that the return was 1.5%. An IRR calculation would give a return of 6.14% on the day that the extra $100 was added.

The formula for IRR is fairly complicated and it isn't something that you can just punch into a calculator and get a number. The basics of the formula is that the number of days every deposit has been in an account is calculated as well as the return that deposit has added to the account. Then that return is calculated on a daily basis and expanded to a yearly return. The formula looks like this:

Internal rate of return (available as a formula in most spreadsheets) accounts for each contribution of additional funds to the portfolio. It also an annualized rate of return. So if you have $100 at the beginning of the year and that $100 grows to $103 after 6 months and you add $100 the total value would be $203 and the 'absolute return' I talked about last time would say that the return was 1.5%. An IRR calculation would give a return of 6.14% on the day that the extra $100 was added.

The formula for IRR is fairly complicated and it isn't something that you can just punch into a calculator and get a number. The basics of the formula is that the number of days every deposit has been in an account is calculated as well as the return that deposit has added to the account. Then that return is calculated on a daily basis and expanded to a yearly return. The formula looks like this:

Current Value = sum [(Deposit_x)*(IRR)^t_x ]

t_x is the time (in days) the Deposit_x was in the account.

In this equation you have to solve for IRR which usually involves trial and error. Fortunately, Excel provides a couple of variations of this formula as a built-in formula (if you have the financial formulas installed). The formulas are IRR, XIRR and MIRR. IRR used when you have regular cash flows (say you add $100 to your account every month). XIRR is used when you have irregular cash flows (say you add $100 whenever you can which sometimes can be every week but can also be every other month), and MIRR (Modified IRR) I'm not sure about...

For more information on Internal Rate of Return you can start by checking out the Wikipedia entry found here.

category: Personal Finance
posted on Saturday December 09, 2006 at 10:28:11
by: 0xCC

Since it is getting close to the end of the year I think it might be a good time to look at how to measure the return of your portfolio. I use 3 different ways of measuring return; Something I cal "Absolute Return", something called "internal rate of return" and a third method that I don't know the name for but I'll call "invested return".

Let's start with a look at absolute return. This is the simplest method, it is basically taking the current value of our portfolio, subtracting the value at the start of whatever time period I am interested in (typically the end of the previous year) and also subtracting any additional funds I have put into the account and dividing that whole amount by the value of the portfolio at the beginning of the time period of interest. So if X is the current portfolio value and S is the value of the portfolio at the start of the time period and A is extra funds added during the time period the formula looks like this:

Problems with this method? Doesn't account for the fact that you have added extra funds and those funds have had an effect on the overall value of the portfolio (they have either added value or detracted value from the portfolio). Also, it isn't attached to any sort of time period so it can be hard to compare across different time periods.

I'll look at the other two methods in future posts, hopefully in the next week or so.

Let's start with a look at absolute return. This is the simplest method, it is basically taking the current value of our portfolio, subtracting the value at the start of whatever time period I am interested in (typically the end of the previous year) and also subtracting any additional funds I have put into the account and dividing that whole amount by the value of the portfolio at the beginning of the time period of interest. So if X is the current portfolio value and S is the value of the portfolio at the start of the time period and A is extra funds added during the time period the formula looks like this:

Absolute Return = (X - S - A)/S

Problems with this method? Doesn't account for the fact that you have added extra funds and those funds have had an effect on the overall value of the portfolio (they have either added value or detracted value from the portfolio). Also, it isn't attached to any sort of time period so it can be hard to compare across different time periods.

I'll look at the other two methods in future posts, hopefully in the next week or so.

category: Personal Finance
posted on Saturday December 02, 2006 at 13:56:27
by: 0xCC