Calculate Portfolio Returns explained.

This is a simple formula to calculate portfolio returns. I prefer to use it annually however you can use the formula monthly measuring performance depending how active you are.  

There is a multitude of portfolio, investment, and financial management software available. In my personal experience, I still after 15 years prefer to use excel for practically everything to do with investments. I have tried a lot of different subscription and software services, but I have tailored my own systems to reflect my own process and how I manage my wealth.

Not only for privacy reasons, but due to different assets, investment classes, tax jurisdictions I have found limited products that can provide and all encumbering way to manage my portfolio returns. I use multiple brokerage accounts and invest in a variety of global exchanges. Early on in my investment journey I came across a simple formula to measure portfolio returns which when adding into excel makes it quite easy to give an accurate and automated update on my portfolio performance.

This changed the way I measure my performance against what ever benchmark I was comparing against. My investment structure is broken down into different areas, so I use the formula for each segment of the portfolio then one combined overall return.

It works well for me but may not be suitable for you and your portfolio.

What is the Formula to Calculate Portfolio Returns?

• Starting Capital x F = 100
• F being the factor we need to multiply our capital with to determine our gain/loss.

You may be thinking what on earth is this guy talking about? However, the concept is quite simple.

This is how we will calculate our overall returns (ignoring capital in and cash drawn out). Let us assume you start the year with $150,000 capital. You want to equate the starting capital with 100% and calculate any gains or losses from this starting point. So our starting formula will look like this.

$150,000 x F = 100

To determine what F is we need to arrange the formula in a way to work out the number F. We simply rearrange the formula to come up with the below.

F = 100 ÷ $150,000 = 0.00066666666

When we input this decimal into the formula we come up with the correct calculation.

$150,000 x 0.00066666666 = 100

How to use the Calculate Portfolio Returns formula?

Using the above decimal of 0.00066666666, this becomes the number we multiply our portfolio value by to determine whether we are up or down. As a simple explanation, below 100 means a loss and above 100 means a gain. It may look complicated now but once set up in a tab in excel the whole process becomes automated.

Let’s say after a few months our starting capital of $150,000 has grown in value to $166,750 we simply multiply the new total portfolio amount by our decimal number to get our return to date.

$166,750 x 0.00066666666 = 111.166665555 or 11.16%

*We minus the 100 to get our actual return.

If we don’t add any fresh capital or withdraw capital from the brokerage account, then you can use the multiple for the entire year. (If we lost money and our number equals say 90 it means we lost 10%).

Measuring performance with cash injections or withdrawals?

The formula needs adjusting when you add new capital or withdraw from your portfolio, we need a new factor as it will create a new balance and show an inflated gain (or loss if you draw money out). To determine a new F we have to once again reverse the formula to find out the new decimal to multiply our portfolio value by.

Let’s assume we add $10,000 of new capital to our current portfolio value of $166,750. That would bring our new portfolio value to $176,750. If we multiple this new sum with our old formula it would show an inaccurate inflated gain of 117.833332155 or 17.83%. To get back to our real portfolio return we must change our factor to a smaller decimal as per below to ensure we carry on the 11.16% gain.

F x $176,750 = 111.166665555

F = 111.166665555 ÷ $176,750 = 0.0006289486

So our new factor is 0.0006289486 and sure enough we multiply $176,750 x 0.0006289486 = 111.166665555 or 11.16%. If later on in the year our portfolio increases to say $189,540 we multiple this by our decimal number 0.0006289486 to get 119.210918186 or a 19.21% gain.

If you take money out the same concept is true, we must renew our decimal factor to always reflect the true return on our portfolio. You always want to start at the new percentage prior to the flow of capital in and out of your brokerage account.

In Summary…

On January 1^st every year you simply note down the final percentage gain/loss down for the year and then start again to equal 100 for the new year. I have found this an easy way to track performance. In excel I can ignore multiple brokerage accounts, awaiting final statements and simply set up my portfolio to give me a very accurate account of my yearly gain or loss.

Once you have a few years under your belt you can work out your Compounded Annual Growth Rate.

My system is automated, and all my holdings update every 20minutes (I don’t check it regularly, it is just the way I set it up drawing data from stock exchanges) so my portfolio gain/loss is reflected in real time value every day.

This looks quite complicated at first but once you play around with it and set it up, I think you will find it quite useful. I searched high and low for a simple method to measure all my investments and found this gem to be the most useful.