Estimate Your Portfolio’s Rate of Return - Calculator

Some of you may be wondering how well your specific portfolio performed last year. Figuring out your exact personal rate of return requires you to know the exact dates of all your deposits and withdrawals, along a financial calculator or software program with an IRR function. For an simple and quick estimate of your returns for 2006 (or any other period), try this tool instead:

Instructions

1. Get your initial balance. This is probably from your brokerage statements. Try the December 2005 one.
2. Tally up any deposits or withdrawals. For example, maybe you maxed out your Roth IRA contribution and also put in 5% of your $50,000 salary into a 401(k). That would be $4,000 + $2,500 = $6,500. Perhaps estimate your commissions, if any. No need to worry about the dates.
3. Get your final balance. Your December 2006 statement is probably available already.
4. Find the time elapsed between your initial and final balances.
5. Hit Calculate. An estimate of your annualized return is instantly given.

My Own Example

1. I used my January 2006 net worth snapshot, which had my IRAs + 401k balance total as $40,031.
2. We had two Roth IRA contributions and $10,500 into a Self-Employed 401k, for a total of $8,000 + $10,500 = $18,500
3. According to my January 2007 snapshot, our IRA + 401k balance was now at $69,457.
4. 1 year elapsed, plus or minus a couple of days.
5. My 2006 return for my portfolio is estimated at 22.2%!

How Good Is This Estimate?
The calculator assumes that the inflows and outflows are spread evenly around the middle of the year. However, unless the deposits and withdrawals are very large as compared to the initial balance, the estimates are actually pretty good.

For example, let’s say that you start with $100,000 on 1/1/06, and end up with $120,000 on 1/1/07. If you had net deposits of $10,000 during 2006, the calculator above would estimate your return at 9.52%. If the $10,000 was actually deposited all at once on one of these specific days, you would get the following exact returns:

In my case, I dug out the dates and figured out my exact rate of return (see below) to be 21.6%. That’s only a 3% difference from the 22.2% estimate given by the calculator.

I Want Exact Numbers Too!
For everything you ever wanted to know about rate of return and then some, see Gummy Stuff. I must warn you that it’s very math intensive. If you just want to know how to figure out the numbers, see his XIRR page. There’s even a spreadsheet you can download and use. Remember, you’ll need the exact dates of all your fees, commissions, deposits, and withdrawals.

Wait, How Does The Estimator Work?
I originally saw this method in The Four Pillars of Investing (review). Let’s take the previous example again, but take away some zeros. You start with $100 at the beginning of the year, and at the end of the year you have $120. In the middle you contributed $10. So you earned $10, but compared to what? What’s the denominator? $100? $110? If you estimate by assuming it came in the middle, it’s $105. So you made the equivalent of $10 on $105. Figuring out that return is easy:

10/105 = 0.095, or a 9.5% return.

For periods other than one year, I annualized the return. If you already have a ‘rate of return’ from your investment statements, try and compare your results.

Like this tool? Check out the rest of my Tools and Calculators. I hope they are useful.

Find more in Investing, Tools & Calculators | 1/8/07, 11:47pm | Trackback