SIMON BROWN: Working out your real returns

The whole point of investing is returns: making money and growing that money ahead of inflation so that we create real wealth.

The first port of call is to beat inflation, otherwise we’re losing spending power and going backwards. The second is to ensure we’re beating, or at least matching, the overall market. This is important because if we’re underperforming the market we should stop trying and simply buy the market via a low-cost exchange traded fund (ETF).

But how to calculate your returns? Pretty much every online platform shows me only the price return of a share I hold, using the average price paid. In other words, not a total return (that includes dividends) and no annual return so I can compare my performance against that of the overall market.

So we need to work out our own returns and though this requires a bit of effort up front it quickly becomes a simple task, taking just a few minutes every month.

Let’s start today with the current value of your investments. I would focus on self-managed investments and separate out your tax-free account and ignore third party investments such as your retirement annuity and the like. The latter will offer annualised returns, and with your tax-free account you use the same process but you should manage the records separately.

Say your portfolio sits at R125,000 (made up of stocks and cash in the account); the next step is to unitise it and decide how many units you’ll create. The number doesn’t matter but I like units around R100 so let’s use 1,250 units, each worth R100.

A week later your portfolio has received some dividends, which are now sitting happily in the cash portion of your portfolio, and the shares have gone up so that the total value is now R129,000.

You still have 1,250 units, but each unit is now worth R103.20, so your return for the week is 3.2%.

This is the easy part but you also have to adjust for any money you add or remove from the portfolio.

Let’s say it’s payday and so you add R3,500 into your portfolio. Money added increases the number of units. That R3,500 buys you 33.914 new units. In other words, the money added — R3,500 — divided by the unit price of R103.20. We use three points after the full number so we don’t lose details in the rounding.

So now you have 1,283.914 units at a value of R103.20 each which will equal the portfolio value of R132,500.

A few weeks later the unit value is unchanged and you want to withdraw money so you basically sell units. Say you need R10,000 at R103.20 a unit. You’d “sell” 96.900 units at R103.20, leaving 1,187.014 units.

In summary, the rise or fall in the value of the portfolio, including cash, changes the unit price while money added or withdrawn changes the number of units, not the value.

You now have a simple way of keeping track of your returns as you track the unit price, with a great means to measure your success at DIY investing.