How to work out geniune returns on investments

Milarky

Whether they have to by regulation or are allowed to by regulation and just think it's a good 'honest' selling point, investments are often described as 'returning X% over 5 yrs'. To me this is simplistic and misses the point that if you are a saver rather than an investor you have probably built up those investments over time [eg regular premiums] and didn't have the cash to put in on 'day 1'.

For savers, the return on their investment isn't measured by the percentage change in a single indicator [such as share price] between a fixed date and today, it is measured by something else.

Using a spreadsheet [how else?] you need to record how much was put into a particular investment, on which date, and list these. At the foot record the current valuation [which the firm provides]

For instance

£1,000 on 3 June 1999 now worth £1187
£400 on 8 Sept 1999 now worth £445
£500 on 2 Mar 2000 now worth £515
£500 on 7 Nov 2000 now worth £543
£250 on 13 April 2001 now worth £311
£250 on 12 Jun 2001 now worth £292
£250 on 10 Oct 2001 now worth £352
£300 on 2 May 2002 now worth £349

Current value [from summing the above]: £3994 from a total investment of £3450

Now an investment company may just tell you you've made '£544' on this - which you already know. Also, the above may include reinvested dividends - so not knowing that alters the picture.

However there is a number which captures exactly what has happened to your money while they've had it, and that is the equivalent interest rate - what rate of daily interest would have had to be paid on each of your investments [and compounded as added] for the different periods of time that these have been held.

Using the old spreadsheet this is worked out at 2.6873% [just about equal to the RPI - well, it was a stockmarket investment! And I have just made up the figures]

Notice, though that the current value of each investment segment under this calculation will differ from its actual valuation since an interest rate-return calculation assumes that all initial values increase proportionally to the time they have been held [which is just what they have to do when doing the 'what your investment may be worth' calculation on the illustrations for regular savings plans and pension etc] The figures are:

£1,000 on 3 Jun 1999 revalued at: £1,190.06
£400 on 8 Sep 1999 revalued at: £472.68
£500 on 2 Mar 2000 revalued at: £583.34
£500 on 7 Nov 2000 revalued at: £572.84
£250 on 13 Apr 2001 revalued at: £283.17
£250 on 12 Jun 2001 revalued at: £281.94
£250 on 10 Oct 2001 revalued at: £279.49
£300 on 2 May 2002 revalued at: £330.46

Thus some of the segments have done 'better' than the average [basically the investments added after 1999/2000] whilst others have done 'less well' - exactly what what you would expect with 'average' numbers.

deemy2004

what about the dividends ?

What I do on a monthly basis is update - Current value Divided by (total deposits Minus total withdrawls (including dividends) ) = Net % gain

Then that % is divided by the total months invested and then X 12... i.e. so the number of months invested increases by 1 each month.

It gives a good approximation of the actual rate of return, and is easy to update once a month.

As an example

Current value £55,000 /( Total deposits £50,000 Minus Total withdrawls £3,000) , Net % gain 17%

Months invested 30

Thus 17 Divided by 30 X 12 = 6.8% annualised return. Offcourse this is not adjusted for RPI.

Stonk

deemy2004 wrote:

Current value £55,000 /( Total deposits £50,000 Minus Total withdrawls £3,000) , Net % gain 17%

Months invested 30

Thus 17 Divided by 30 X 12 = 6.8% annualised return. Offcourse this is not adjusted for RPI.

I realise you said it was an approximation, but this calculation is a misleading way to work out the annualised return. For 30 months it is not too far off, but the approximation gets progressively worse as the time period lengthens. It is certainly wrong to state the answer as 6.8% - writing it to 2 significant figures implies that it is accurate in those 2 figures, which it isn't. It is actually a 6.4815% annual return - a significant difference.

deemy2004

Stonk wrote:

I realise you said it was an approximation, but this calculation is a misleading way to work out the annualised return. For 30 months it is not too far off, but the approximation gets progressively worse as the time period lengthens. It is certainly wrong to state the answer as 6.8% - writing it to 2 significant figures implies that it is accurate in those 2 figures, which it isn't. It is actually a 6.4815% annual return - a significant difference.

6.8% against 6.5% is good enuf approx for me

Less painful to carry on with the above then spend time creating a new more accurate formula / spreadsheet thats easy to update. I suppose the use of reset dates and figures would help

Stonk

deemy2004 wrote:

6.8% against 6.5% is good enuf approx for me

Fair enough. Plenty of people shift vast sums of money into different savings accounts for that kind of difference!

deemy2004

Well savings accounts are an altogether different kettle of fish...

Where its the annual AER that determines that aspect.. I was referrign to the stocks portfolio.

Milarky

deemy2004 wrote:

what about the dividends ?

They are just ignored in this example. I have assumed that dividends paid on each segment have been reinvested in that segment [no uninvested cash] and that the current value given is therefore in respect of slightly more shares than originally purchased...

Similarly, if you withdraw a partial sum in the meantime, those shares could not be included in the current valuation, and that sum would be a 'negative' entry in the interest-rate return calculation.

Below I've reworked the example to assume that the third investment [of £500] did not take place and instead the second investment [of £500 originally] was cashed in at its 'then' value of £474. [I've estimated that figure from comparing the present values of the two investments - the first one would be valued lower than the second one today so it's about: '£500 x (515/543)']:

At revaluation rate of:......2.6873%
£1,000.00.....3 Jun 1999.....£1,190.06 .....£1,187.00
£400.00.....9 Sep 1999.....£472.68.....£445.00
£500.00.....2 Mar 2000.....£583.34..... £0.00
-£474.00.....7 Nov 2000.....-£543.06.....£0.00
£250.00.....13 Apr 2001.....£283.17.....£311.00
£250.00.....12 Jun 2001.....£281.94.....£292.00
£250.00.....10 Oct 2001.....£279.49.....£352.00
£300.00.....2 May 2002.....£330.46.....£349.00

Sum invested = £2,476.00...........gain/loss =£57.90

In the first iteration above the gain is £57.90 at 2.6873%. The fact that a partial sum is withdrawn is catered for by revaluing the negative amount by exactly the same factor, but leaving the previous deposit 'untouched' also - even though it is cancelled in reality - and revaluing that up at the same rate also.

At revaluation rate of:......3.0472%
£1,000.00.....3 Jun 1999.....£1,217.70 .....£1,187.00
£400.00.....8 Sep 1999.....£483.21.....£445.00
£500.00.....2 Mar 2000.....£595.33.....£0.00
-£474.00.....7 Nov 2000.....-£552.89.....£0.00
£250.00.....13 Apr 2001.....£287.87.....£311.00
£250.00.....12 Jun 2001.....£286.45.....£292.00
£250.00.....10 Oct 2001.....£283.64.....£352.00
£300.00.....2 May 2002.....£334.70.....£349.00

Sum invested = £2,476.00...........gain/loss =0.00

Then, by adjusting the factor continuously until the the 'gain/loss' figure is down to zero - or as close as possible - the required equivalent growth is found. Not surpirsingly it's a bit different - in fact it's gone up a bit. As long as the cancelled/withdrawn investments values are noted at the time that they are made the whole thing can be revalued to take full account of them