Portfolio's new time-weighted return performance chart: How is it working?

13th Jun '21 by Andy Sav

4 comments 440 reads

version: v1.0

Introduction

Being a data geek (I'm in IT, but not in Finance), I got excited when Stocko introduced the following new feature https://www.stockopedia.com/pr... I have been investing since 2018, so very much a beginner. So, when I see a new feature like this, I want to use it and understand how it can make best use of it. However, a few things lead to me asking more questions. I am currently in conversation with Oliver via support, but have decided to write this before I have given him time to answer some of my assumptions (sorry Oliver), so please be wary of this article at this point. I will amend as I get conformation and will change the version number above. I wanted to create the post as I have time over the weekend and its fresh in my mind. It may also help others who have similar questions etc

Ensuring your portfolio is setup / compatible with the new performance chart

Clicking on the Performance toggle on the chart for the first time, your quite likely to be asked to add cash to your portfolio. As the message states, they are providing an accurate view of performance and they need to protect that:

But what does that mean; "accurate performance"? Basically, the calculation will produce an inaccurate / invalid result if your transaction Cumulative Balance drops in to the negative. As shown here, Stocko has picked up the first time the portfolio has a negative balance on 03/01/2020. It wants a cash deposit made, to cover the total negative balance amount, before the first buy that causes the first negative cumulative balance entry.

It is crucial to always ensure cash entries occur before a purchase (or set of purchases) occur, or you could still be asked to add more cash. You can do this by making use of the time option when creating a transaction. By default, all entries are created at midday, which means the order of deposit and purchase is at risk of being inconsistent.

Not everyone uses the cash deposits and withdrawal transactions. If you are in this boat, then Stock is likely to ask you to drop a massive cash transaction at the start of your portfolio transaction history. Every time you make a purchase (without…

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Rusty2

13th Jun '21

Adding a large cash deposit at the inception of the folio can’t give you accurate figures unless that was the case, in my case my folio I started in 2016 and it has gone over the years, partly by adding cash and partly by share prices going up. Looking at my figures they don’t look right at all, especially in the early years.

Also last weekend for some reason my 1 year profits went up around 50% for some reason, maybe because of the cash deposit? The total gains figures if you buy and sell shares in the same stocks are incorrect, not sure if that effects the performance figures or not.

The figures for the current year maybe of some use but I will ignore the early years. On the old site, which I use still, there was no need to add cash. I’m now getting an error message on the old site about cash imbalance on one folio even though on the new site it says it’s accurate.

Oliver Cooper

15th Jun '21

The method you would prefer is a valid alternative way of calculating your return, but is money-weighted and as such not agnostic to cashflows.

As an example of this, suppose you have invested 70k and it is now worth 100k. Your return would be:

(100k/70k)-1 = 42%.

If you now add an extra 30k of stock to the portfolio your return is

(130k/100k)-1 = 30%.

This means your portfolio return has dropped by 12% post the injection of new funds.

Whilst this is not an incorrect calculation, it does make it harder to compare yourself to other benchmarks or funds. This is resolved with time-weighted return as as the daily portfolio change calculation on the date of funds being added is:

130k/(100k+30k)) -1 = 0%

In that way the time-weighted return is a better proxy for the performance of your investment choices, rather than when you had money to drip into the portfolio.

Andy Sav

Much appreciated, thanks Oliver

16th Jun '21

Adding a cash deposit at the start does not give very accurate performance figures. I have deleted the cash deposit which was substantial and then added cash when transactions went into the red. This has changed the performance figures considerably even in the last year which I did not really expect, I suppose it was basing them on cash that was deposited 5 years ago. It was only since November 2020 that I needed to add any cash after the initial set up back in 2016. I'm happier now with the performance figures.

Portfolio's new time-weighted return performance chart: How is it working?

Introduction

Ensuring your portfolio is setup / compatible with the new performance chart

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About the Author

Andy Sav

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