Track that Portfolio Investment Return

September 16, 2008
Chandan Sengupta

Physician's Money Digest, April15 2003, Volume 10, Issue 7

Do you know what return you earned onyour investment portfolio in the past 5years? Most investors have a vague idea atbest, paying little attention because they think itdoesn't matter, or it's too much work.

Neither of those assumptions is actually true.Monitoring your returns matters a greatdeal. Unless you know how well youroverall portfolio is doing rather than justremembering that you once bought astock that tripled in price, you won'tknow if you need to make any changesto your portfolio and your investmentapproach. Most people waste years, oreven a whole lifetime, earning sub-parreturns. They miss out on making hundredsof thousand of dollars withoutever realizing they missed out.

Keeping track of your portfolio'sreturn is not too much work unless youlet yourself get bogged down in unnecessarydetails. What's more, the informationwill be worth every minute it takesto generate. The simpler you keep yourportfolio, the easier it is to track yourreturn on investment (ROI) and thehigher your chance is of achieving investment success.The following process can help you keep trackof your ROI and best use the information:

1. Define your giant portfolio. The returnthat matters most is the return on your entireinvestment portfolio—I call it the giant portfolio—which includes all your investment accounts,including you and your spouse's retirementaccounts, your regular accounts, the 529 accountsfor your children, etc. Exclude your checkingaccount and any savings or money market accountunless they are part of what you consider to be yourinvestment portfolio. Once you have carefullydefined your giant portfolio, recognize that transfersof money among the accounts don't matter;only movement of money into and out of this giantportfolio matters, because you want to track thereturn on the entire giant portfolio. You may wantto measure return on the individualaccounts as well, but that is much lessimportant than your overall return.

2. Keep records. You'll need to keepvery few records. Calculate and recordthe total value of your giant portfolioonce or twice a year—once at year-end,and maybe once in the middle of theyear. This amounts to nothing more thanadding up the balances in all the accountsbelonging to your giant portfolio.

Keep a running record, with datesand amounts, of any money you put intoor take out of the giant portfolio. Thisshould include all routine and automaticcontributions through payroll deductions,automatic transfers, etc. You don'thave to track the reinvestment of dividends,capital gains, or interest income,and you should ignore all movements ofmoney among the accounts within the giant portfolio.Also, keep a running record of any investment-related expenses that are not deducteddirectly from the accounts in your giant portfolio.

Once a year, estimate from your tax return thetaxes you pay on capital gains, dividends, interestincome, and any other returns from investmentsincluded in your giant portfolio. Unless you haveworked hard to make your giant portfolio reallycomplex, this is not much record keeping. Jot downsimple notebook entries at the time a transactiontakes place instead of waiting until the end of theyear. It's a good idea to make a habit of keeping thisrecord for the rest of your life.

3. Calculate returns. With the informationyou have collected, calculating the return will beeasy, but it has to be done using a computer program.You may know enough to do it yourself inyour Money or Quicken program by setting up apseudo account for your giant portfolio. Or youmay have someone else (eg, a financial planner orknowledgeable relative) do it for you. Even in themost complex situation, it can't take more than afew minutes a year (after the initial data have beenset up in the first year) if you have managed to keepthe appropriate records.

4. Compare and act. This is why you wentthrough the first 3 steps. You should compare thereturn on your giant portfolio with an appropriatebenchmark—typically the return on a passive portfolioof equal risk for the same time period. To doit right, you will need the help of a financial planneror investment advisor.

If you don't have one, you can do a first-cutcomparison on your own. If your portfolio is mostlyin stocks, compare your return with that of theVanguard Total Stock Market Index Fund(VTSMX). If you have a mix of stocks and bonds,use the Vanguard Balanced Index Fund as yourbenchmark. The latter invests 60% of its money instocks through the VTSMX and the other 40% inbonds through the Vanguard Total Bond MarketIndex Fund. You can get quarterly and annualreturn information for both of these funds fromeither Vanguard (www.vanguard.com) or Morningstar(www.morningstar.com).

If your returns vary considerably from theappropriate benchmark, investigate and take someaction. This may not be easy to do, but at least youknow there's a problem that you need to address.

Chandan Sengupta,author of The OnlyProven Road to InvestmentSuccess (JohnWiley; 2001), currentlyteaches finance at theFordham UniversityGraduate School ofBusiness and consultswith individuals onfinancial planning andinvestment management.He welcomesquestions or comments at chandansen@aol.com.