Monday, 14 January 2013

Tracking Portfolio Performance

I like knowing things. But sometimes I lack the native speaker’s grasp of a language to be fluently knowledgeable in matters foreign to my still-evolving mind. So I’ve been dragging my feet over calculating my portfolio’s return, because I’m not entirely confident of my math.

Which means I’m either going to make a passable effort, or fail spectacularly. Better to make the effort and be a good sport however it turns out.

So for the past few months or so, I’ve been tracking my daily portfolio value, by logging into my FSM account – why – so I can track my portfolio’s daily return – why – so I can compare my portfolio’s return with a risk-free rate of return: a certain 3.5% p.a. courtesy of the CPF-OA interest rate.

If my portfolio of investments fail to beat the risk free rate of return, then I’m just pissing away my time and money, and I’d be better off leaving my money in Singapore Government Bonds, which the CPF invests in. (On a side note, I found no info about the portfolio of the CPF monies i.e. which SGS Bonds they’re invested in…if anyone can point me in the right direction, I’d be grateful).

I thought calculating returns would be a simple task of calculating the difference between how much I put in versus how much I got out. Turns out, like many things in finance, it can get quite a bit more complicated if one so chooses.

Sure I can find out how much I made, but that’s not all there is to returns. I also want to know the magnitude of any positive/negative returns over a given period.

There are other limitations with a simple, 1-number measure of performance. That measure of performance, expressed in a formula is: (current value/initial investment)-1.

Firstly, it doesn't tell you which fund contributed to the portfolio’s performance. If a fund is losing money, I want to know about it, and whether it’s doing so because the market is crap in general or the fund manager has decided to dedicate his life to improving his golf handicap instead of generating returns.
Secondly, realized losses aren't captured. For example,

Say I held two funds from 2011 to 2012, with $1000 in each fund (Initial investment=2000, current value =2000, performance = 0%).
Two months later, one fund drops 50%, while the other remains constant. (Initial investment=2000, current value =1500, performance = -25%).
In a fit of anger, I realize my loss, selling all my units of that losing fund. (Initial investment=1000, current value =1000, performance = 0%).

Presto, I've no longer incurred a loss on my portfolio. This is problematic because it doesn't provide an accurate measure of the performance of my portfolio. (it hides the losers, while illuminating the winners. Survivorship bias anyone?)

So I’m left with the challenge of finding a way to track the performance of my portfolio, adjusting for various ups, downs, ins, and outs of its performance.
In the 1800s, the intelligentsia thought having heretics wear dunce caps would improve their intelligence. Sadly, neither intelligentsia nor heretics have matured much since then. (Source: