Author Topic: How to Track Returns on paper - Average Return? CAGR? Other?  (Read 4585 times)

heybro

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How to Track Returns on paper - Average Return? CAGR? Other?
« on: April 18, 2016, 11:29:19 PM »
Hello!

This post is in regards to my simple at home record keeping.  You see, I still like to write out my accounts by hand in a notebook, as one would do with a checkbook.

When it comes to IRA accounts or Investment accounts, I have actually honestly only kept track of how much I was putting in.

So, my book looks like this (these are made-up numbers):
1-1-16 Contribution 500.00     Total 500
2-1-16                     500.00              1000
3-1-16                     500.00              1500

My actual account will actually be something like 2200 because I will have made investment gains.  The reason why I have only listed what I have put in is because I understand the market goes up and down and knowing the amount I have put in has served as a baseline of which to compare how my account returns are doing.

Well, as I get more and more money, I want to keep track of my investments in such a way that I know exactly what my rate of return is for the year as well as what my rate of return is for the entire period (over 30 years or something going forward).

So, I've come up with this:

I have one section in my notebook that actually lists how much I contribute each month as well as how much is gained or lost each year.  The value of the account in real life will be the same value that my notebook lists.  I will only reconcile the actual value to the value in my notebook once a year as a yearly gain or loss so that I'm not looking at my accounts like a hawk every week or month.

In addition, I would also have a separate page that lists how much was contributed for each year as well as what percent was earned/lost for that year and what percent the average return is for the entire life of the account.

Year    Amount contributed   Actual Amount in Account      Percent gain or lost that year                 Percent Return Since Inception

2015            10,000              10,300                                       3%
2016            11,000              22,365                                        5%
2017            10,500              32207.70                                 (2%) negative
2018              9,000              45,328.47                                10%
2019             10,000             64,181.03                                 16%                                                                      ???????

My question is, how would I determine what the average rate of return is for that entire period (to be put in a 5th column)?  Or, what is a better way of tracking these accounts.  I don't want to simply have a page in my notebook that tells me how much is in my account.  I want to instead be tracking these accounts in such a way that I know if they are doing good or not.  If the total in my account drops 50% one year, but I still see that I've enjoyed a rate of return of 5% since inception, I won't really care if it drops 50% you know.  I basically want to buy and hold like we are supposed to do and have a book keeping method that matches that perspective.
« Last Edit: April 18, 2016, 11:36:00 PM by heybro »

Bertram

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #1 on: April 19, 2016, 02:29:22 AM »
I think you are looking for the Internal rate of return for your investment.

This page explains it:
https://www.mathsisfun.com/money/internal-rate-return.html

But there are many others as well. This is an iterative process to get a good approximation for the return rate. Very cumbersome to do with pencil. I would recommend to use excel, which has a function for it. Search for "XIRR" and you will find many examples, all you need is a specific format for all the cashflows. It can be a bit finnicky when you set it up at first, because it will just give an error-return value and not tell you why (usually either the format is wrong, or your start value for where the function starts "guessing" is too far off).

If you prefer not to do that, and all you really care about is comparing to a 5% return rate, it may be easier to simply caculate your investments as if you had a fixed return rate, and just look at what amount you should have. This is the net present value from the above link. You will still have to caculate the interest for each cashflow, but at least it's not iterative.

heybro

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #2 on: April 19, 2016, 04:40:54 PM »
Oh okay!

So, in that case, I was thinking of just keeping an on-going total of what an 8% return would be - year after year.

Over the course of 2015, I am contributing each month, so I would pretend like all that money (the total added for all the months in 2015) had just been deposited on jan 1st of 2017.  That allows the entire amount to have actually sat an entire year.  [It doesn't make sense to think that nov/dec had been in there an entire year for instance once 2016 hits).

So...

1-1-15 0
1-1-16 $1500  (no interest even though every month in 2015, a little was added)
1-1-17 (1500 x 1.08 + 1500)

Sound good?  Or, when would you recommend to actually calculate interest on contributions.  I think the yearly total needs to have sat in there for an additional complete year.

Finally, if this is so complicated and elusive to calculate, how do we know that the market gives back an average of 8% a year?  Is that EVEN true?
« Last Edit: April 19, 2016, 04:43:54 PM by heybro »

MDM

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #3 on: April 19, 2016, 06:09:35 PM »
...if this is so complicated and elusive to calculate...

It is not elusive at all.  Very easy, using a spreadsheet.

Retire-Canada

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #4 on: April 19, 2016, 06:41:17 PM »
Finally, if this is so complicated and elusive to calculate, how do we know that the market gives back an average of 8% a year?  Is that EVEN true?

**sigh**

Check what performance analysis options your brokerage provides. You may not even have to crack open a spreadsheet.

heybro

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #5 on: April 20, 2016, 12:28:31 AM »
So, what is the formula to use then to see return since inception?  I don't like keeping my records on a computer because I've had them wiped out before (even when backed up) and I like sitting at a desk with pen and paper and calculator.  Too much is on computer.  Thank you!  If there is no easy formula, that is fine, give me the hard one anyway!  I did all my homework (advanced math classes) on pen and paper.  Don't understand why everyone is against it now. hehe.

MDM

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #6 on: April 20, 2016, 12:48:34 AM »
So, what is the formula to use then to see return since inception?  I don't like keeping my records on a computer because I've had them wiped out before (even when backed up) and I like sitting at a desk with pen and paper and calculator.  Too much is on computer.  Thank you!  If there is no easy formula, that is fine, give me the hard one anyway!  I did all my homework (advanced math classes) on pen and paper.  Don't understand why everyone is against it now. hehe.

From http://www.excelfunctions.net/Excel-Xirr-Function.html:


Retire-Canada

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #7 on: April 20, 2016, 06:25:13 AM »
I don't like keeping my records on a computer because I've had them wiped out before (even when backed up) and I like sitting at a desk with pen and paper and calculator.

Should you decide to use a spreadsheet you can print it out and keep a hardcopy for your records. That's not to say you shouldn't use a pencil and paper if that makes you happier.

Personally I think my digital records are more secure than anything on paper hence I tend to scan any hardcopies I have and store my records that way, but each his own.

GreatLaker

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #8 on: April 26, 2016, 11:45:36 AM »
Year    Amount contributed   Actual Amount in Account      Percent gain or lost that year                 Percent Return Since Inception

2015            10,000              10,300                                       3%
2016            11,000              22,365                                        5%
2017            10,500              32207.70                                 (2%) negative
2018              9,000              45,328.47                                10%
2019             10,000             64,181.03                                 16%                                                                      ???????

My question is, how would I determine what the average rate of return is for that entire period (to be put in a 5th column)?
Total return since inception = 1.03 x 1.05 x 0.98 x 1.10 x 1.16 = 1.35 = 35% total return
Annual growth since inception =  fifth root of 1.35 = 1.35^(1/5) = 1.062 = 6.2% average over the 5 years
With a scientific calculator you can use the yth root of x function where x = total return and y = # of years
(Assumes the annual returns you posted above are correct - I did not verify them.)

Here is a link that explains how to calculate it using Excel's XIRR function:
http://canadianmoneyforum.com/showthread.php/14538-Question-to-OpenOffice-users-how-to-calculate-XIRR?p=162574&viewfull=1#post162574
Post #2 explains how to do it for a one year period
Post #4 shows how to do it for multi-year periods
Post # 10 shows how to calculate for multiple accounts

GreatLaker

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Re: How to Track Returns on paper - Average Return? CAGR? Other?
« Reply #9 on: April 26, 2016, 12:56:12 PM »
For people that like spreadsheets, this one is really good. It gives both compound and annual returns. You need to input the total value, portfolio additions and portfolio withdrawals for each month, but once history is entered, updating it each month is easy.
https://www.bogleheads.org/wiki/Calculating_personal_returns