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Three mistakes to avoid when calculating portfolio return

Published 12-JAN-2021 10:21 A.M.


5 minute read

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The truth about portfolio performance and investment returns is a lot more complex than most people realise. Here’s three tips on better understanding how your money is performing in the market over time from Navexa.

When someone asks you how your investment portfolio is performing, what do you say?

‘Not bad’? ‘Could be better’? ‘Stock X has been on a tear lately’?

If you use a financial advisor to manage your investments, do you simply glance at the ‘annual return’ figure and say that’s how your portfolio has performed?

What about income from dividend payments?

Or taxes?

What about time?

Are you happy to look at the short term and cherry pick assets that have performed well?

In this post, we’re going to explore the common problems people have in understanding and expressing their portfolio performance.

Specifically, we’re revealing three mistakes you should avoid when you’re analysing your portfolio and determining its performance.

These mistakes relate to our understanding and perspective on time, our tendency to ignore the impact of dividend income and reinvesting, and the dangers of ignoring the impact fees and taxation has on your overall portfolio performance.

Here at Navexa, we believe intelligent investing hinges on carefully analysing data to get a clear view of your portfolio’s big picture.

Mistake I: Not Annualising Your Investment Returns

Say you buy a stock at $5.00 and you sell it for $10.00.

Boom, that’s a 100% gain!

Awesome, you doubled your money.

Good for you. But, what’s missing from the above account of your epic gain?


Consider this; Two investors buy a stock each. The stock price of both increases by 100%.

Say it took one of them 12 months, and the other three years.

Is it the same result?

On paper, yes. Their capital doubled.

But there’s little doubt you’d rather do it in one year than three.

When you ‘annualise’ your investment returns, you factor time into your calculations.

There are various methods of doing this, but the basic idea is that you divide your capital gain by the time it took you to realise it.

So, 100% in a year is an annualised 100% gain — it took one year to realise.

But 100% over three years is a 33.3% gain, because it took three years to realise.

Annualising your portfolio performance gives you a more balanced and realistic understanding of your returns over time.

Time, after all, is a finite resource for every investor. So it pays to factor it in!

Mistake II: Treating Dividend Income Separately

If you own a stock that pays a dividend, you’re collecting income simply for holding the company’s shares.

Investments that pay an income are central to compounding capital and building wealth over the long term.

However, there’s sometimes a tendency for investors to think of their stock’s capital gains as one thing and their income as another.

In some ways, they are separate.

But in terms of calculating the true performance of a holding or portfolio, it is vital to factor in dividend income.

For instance...

Say Stock A goes up 100% in price over three years (a 33.3% annualised return), and Stock B goes up 110%.

If you fail to account for dividends, you’d think Stock B would be the winning investment.

But if Stock A paid you a 8% quarterly dividend over those three years, and B only a 3% dividend...

Then you’ll find that despite returning a lower capital gain, Stock A delivered the better return on account of the superior dividend income.

This applies even more so when you’re reinvesting your dividends into new shares in a holding.

It’s vital to treat investment income as a factor in calculating your overall true portfolio performance.

Mistake III: Disregarding Broker Fees and CGT Events In Your Portfolio Performance

Every time you buy or sell an investment, you’ll pay a fee for the transaction to your broker.

Say you pay $10 per trade.

One hundred trades will cost you $1,000 — regardless of whether the investments themselves make any return.

You broker fees should factor into your portfolio performance calculation.

It’s money you’ve spent in the investment process. Money you ideally want to (more than) make back in capital gains and dividends.

The other thing to note about trading fees is obviously that the more you trade, the more capital you’ll burn in the process.

The same goes for CGT — capital gains tax — events.

In Australia, every time you sell a holding you trigger a CGT event.

For argument’s sake, let’s return to the example from earlier.

Say you make a 100% capital gain on a stock over three years.

And say that stock made you another 50% in dividends over those three years.

That’s an annualised gain of 50% (150% total divided by three).

If it was a $10,000 investment to begin with, on paper you’d have $25,000 in capital.

Now let’s deduct the broker fees for buying and selling: $24,980 left.

Now, let’s deduct a notional capital gains tax of 25% on the gain itself ($14,980).

The tax would be $3,745, leaving a gain of $11,235 and total capital after exiting the position of $21,235.

So when all is accounted for — annualisation, broker fees and taxation — you’re investment, while you might have liked the sound of 150%, has returned you a 37.45% annualised return of $3,745 over three years.

How Navexa Gives You a Clearer Picture of Portfolio Performance

The Navexa portfolio tracker platform is designed to help you quickly and easily see your portfolio’s true performance.

That means, your annualised return taking into account dividend income, broker fees and taxation.

Cherry picking results to brag about — like the 150% above, for instance — might seem like a good idea.

But the reality of investing is that you must be blunt with yourself about the costs of making money in the markets.

That means not ignoring the key factors we all have to work with when we buy and sell stocks: Capital gains, dividend income, trading fees, tax obligations and, above all, time.

For more articles on self-directed investing, visit the Navexa Blog.

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S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

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