Performance is tricky. And I’m not talking about figuring out how to get your portfolio to perform well (that’s tough too). But figuring out how to tell whether or not you’re performing well – and then comparing your performance to others – is one of the most complex problems in investment science. Performance calculation experts talk about a number of different methods for calculating the performance of a stock or a portfolio (you can check out some of the various methods on Wikipedia).
Because these calculations are so tricky, the results provided may not be immediately intuitive. In this post, we’re going to take the hood off and walk through how we do things at Zecco.
tonyleachsf’s trade data
for AAPL
The above is my actual transaction history for AAPL, as also displayed on my ZeccoShare profile. Needless to say, this post isn't to brag about how great an investor I am – the $201.67 purchase was near the all-time high for AAPL in December of last year. The data point for looking at two methodologies is 5/5/08, on which day the closing price for AAPL was $183.18.
But to truly understand the overall performance of my investments I needed to plot the historical stock price of AAPL over the time period that I’ve owned the stock. I also plotted the gain/loss figure I expect and what the time-weighted return
calculates:
Zooming in:
1. Gain/Loss
Percentage Gain = ((Ending Value) – (Beginning Value)) /
(Beginning Value)
When I look at my position from a strict gain / loss perspective, it’s easy to see that I put in $366.09 and that my holdings are now worth $366.36, a small gain of about 27 cents. Which is much better than a loss, and I shouldn’t complain.
2. Zecco / GainsKeeper Performance
To get performance results that I can compare to a benchmark
(DJIA, etc) or other investors, I must use a time-weighted calculation which compares each
investment and the timing of each investment.
Simplified Time-weighted Performance = ((Ending Value) – (Beginning Value)) /
(Beginning Value) * (Days Held / 365)
Gainskeeper's calculation puts my performance at a loss of -7.14%. But haven’t I made (very little) money? That doesn’t make sense!
And Now: The Analysis
The differences between GainsKeeper’s time-weighted return
and my expected Gain/Loss calculation becomes immediately evident when I buy
additional stock while the price drops, the gain/loss rate (green line)
increases thanks to my lower average cost.
But really I’m still losing
money, since the stock price dropped lower after my purchase. The GainsKeeper performance calculation (red line) takes that into consideration pretty accurately.
Time-weighted returns measure the returns of the asset
irrespective of the dollar amount invested.
The difference in return calculated is due to the timing of the
purchases. The time-weighted return
adjusts for the purchases and weights each period equally, measuring the performance
as if there had been no trade timing decision.
Clearly this return is most appropriate for comparing the performance of
AAPL with another portfolio security or a benchmark which are calculated using
a consistent approach.
That said, we are thinking it might be a good idea to display both figures on people’s profiles – the gain / loss percentage as well as the Zecco / GainsKeeper performance metric. This should give everyone the clarity and insight they need to make the right decisions.
What do you think? Let us know by leaving a comment to this Blog or by discussing in the Forums.