portfolio tracking and performance measurement

In short

A friend of mine kept every statement in a shoebox for years, and he never once knew if he was ahead. If you have money in an account, you can learn how it is really doing with a few plain steps. Start by writing down what you own and what each piece is worth today. Then record every dollar you add or take out, with the date. Compare your result to a fair yardstick, such as a broad index that holds similar things. Look at the number after fees and after tax, since that is what you keep. Check in on a schedule, not on every headline.

The whole of it

What it is

I once watched a neighbor brag about a $1,000 gain on his account, and then I learned he had put in $5,000 that same year. That is a very different story. Tracking means keeping a clear record of what you own, what you paid, and what it is worth now. Performance measurement means turning that record into a rate of return, which is the percent your money grew or shrank over a set period. The two go together like a ledger and a ruler.

You have probably noticed that an account balance alone tells you little. The balance moves because the market moved, and also because you added or withdrew money. Good measurement pulls those two causes apart. That is the whole point of the exercise.

How it works

A friend of mine likes to say that you cannot steer a ship you cannot see. So begin with the simple version. A return for one period is the ending value minus the starting value, minus any money you added, then divided by the starting value. Say an account starts the year at $10,000 and ends at $10,800, and you added nothing. The gain is $10,800 minus $10,000, which is $800. Then $800 divided by $10,000 is 0.08, or 8 percent.

If you add money during the year, the picture gets cloudier. A deposit raises the balance, but it is not a gain. Two common methods handle this. The time weighted return strips out the effect of when you put money in, so it shows how the investments themselves did. The money weighted return, which many people call the internal rate of return, includes the timing of your deposits, so it shows how your own choices worked out. Neither is wrong. They answer two different questions.

You have probably wondered which one to pick. For judging a fund or a manager, the time weighted figure is the fairer one. For judging your own results, the money weighted figure tells the truer tale. Many brokerage statements show one or both, and the page will usually say which method it uses.

A yardstick matters too. A gain of 8 percent sounds good until you learn that a broad index of similar holdings gained 12 percent. That index is called a benchmark. Pick one that matches what you own. A stock heavy account should not be measured against a bond index. Fit matters.

Fees and tax shrink the number you keep. A fund with an annual expense ratio of 0.50 percent takes $50 a year from every $10,000 held. Funds publish that ratio in a document called the prospectus, and the SEC explains how to read it on its investor education site, Investor.gov. Taxes on gains in a regular account work by their own rules, and the IRS lays them out in Publication 550, Investment Income and Expenses.

The numbers, and where to find yours

If you are holding a brokerage account, the numbers you need are already close at hand. Your monthly or quarterly statement lists each holding, its share count, and its value. It also lists deposits, withdrawals, dividends, and fees. Your year end tax forms, such as Form 1099 from the broker, show the income and the sales for the year. Keep them.

The cost basis is what you paid for an asset, including commissions. It matters because a gain for tax purposes is the sale price minus the basis. Your broker reports basis on Form 1099-B for most recent purchases. If you inherited or were gifted an asset, the basis can follow special rules, and IRS Publication 551, Basis of Assets, explains them.

Some figures change by law each year. The long term capital gains rates and the income brackets that decide which rate applies are set by statute and adjusted for inflation. For the current ones, see the current figure, which the official source publishes each year. The holding period that separates a short term gain from a long term gain is also set by law, and it is the current figure, which the official source publishes each year. If you use a tax deferred account, the yearly contribution cap is the current figure, which the official source publishes each year. Do not trust a number from memory. Check the date on the source.

A worked example

A woman I will call Marisol opened a taxable account on January 1 with $20,000. On July 1 she added $5,000. On December 31 the account stood at $27,600. She wanted to know how she did, and she was honest enough to want the real answer.

Her first thought was simple. The account grew from $20,000 to $27,600, which is a rise of $7,600. But she had added $5,000 herself. So her true gain is $27,600 minus $20,000 minus $5,000, which is $2,600.

To get a rough rate, she needed a base. She had $20,000 for the whole year and $5,000 for half of it. The average money at work was $20,000 plus half of $5,000, which is $22,500. Then $2,600 divided by $22,500 is about 0.1156, or roughly 11.6 percent. This shortcut is called the Modified Dietz method, and it is a fair estimate when deposits are small and few.

Then she looked at fees. Her funds carried an expense ratio of 0.40 percent. On an average of $22,500, that is $22,500 times 0.004, or $90 for the year. Those fees were already baked into the share prices, so her $2,600 gain was already after fees. Seeing that cost in dollars helped her feel in charge of it.

Next came the yardstick. A broad index she chose had returned 10 percent that year. Her estimate of 11.6 percent beat it by about 1.6 points. She did not hand herself a medal. One year is a short stretch, and she knew it.

Last, she looked at tax. She had sold nothing, so she owed no tax on gains that year. Her dividends, though, were reported on her Form 1099-DIV, and she set those aside to report. Marisol closed the folder feeling steady and informed. That feeling is worth more than a lucky number.

Where it goes wrong

I have made this mistake myself, so I say it kindly. The most common slip is mixing up growth with gain. Deposits make a balance larger without making you richer. Leave them out, and the picture clears.

Another slip is picking a benchmark that flatters you. A bond heavy account beating a stock index would be odd, and a stock heavy account beating a bond index proves little. Match the yardstick to the holdings.

A third slip is ignoring cost. Fees look small as a percent, but they repeat every year. A 1 percent annual cost on $100,000 is $1,000 a year, and it compounds against you. Taxes work the same way. Selling often can turn long term gains into short term ones, which the law taxes by different rules.

Short windows fool people too. One good quarter says little. A few years of data, measured the same way each time, says more. Past results do not promise future ones, and the SEC says so on Investor.gov. Finally, watch for missing records. If a deposit or a dividend goes unlogged, your math will be off. Keep it tidy. It pays.

Questions to answer before you leave this page

Do you know the starting value of your account and every dollar you have added or taken out since? Which method does your statement use to report returns, and can you find that on the page? What benchmark fits what you actually own, and does it hold similar things? Have you added up the yearly fees on each fund in dollars, not only in percent? Do you know the cost basis of each holding, and where your broker lists it? When you look at your results, are you comparing the same time period each time? And what schedule will you set for checking in, so that the news of the day does not set it for you?