22-03-2014, 01:05 PM
HOW TO CALCULATE THE RETURN ON YOUR PORTFOLIO
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George Pearson thinks he had a pretty good year last year. He saw his
portfolio grow from $260,000 at the beginning of the year to $356,714 by
year-end. But part of that growth was due to a fairly large addition to his
portfolio—$50,000 he received from a small inheritance mid-year. He also
made a series of withdrawals—$1,200 each quarter—and he added $5,000 to
his portfolio toward the end of the year.
So, how did he really do? What George needs to do is to figure out the
return on his portfolio.
WHAT’S IN A RETURN?
An investor’s total portfolio return consists of the change in value of the
portfolio, plus any income provided by the portfolio during the investment
period. Translating this into an equation, assuming no additions or withdraw-
als, is relatively simple; it compares the ending value to the beginning value to
determine a percentage change in value:
WHICH ONE IS RIGHT?
Can returns that are 1% apart for
the same portfolio both be right?
The answer is no, but sometimes
one may be more appropriate to use
depending on your circumstances
and what exactly it is that you are
trying to measure.
A mutual fund’s reported return is
an internal rate of return—a com-
pound total return. That’s because
the timing of cash flows into and
out of the fund will have an impact
on fund performance, and individual
shareholders.