Personal Return on Investment Calculation
I have been using Quicken to track my investments for many years and feel it’s a quite convenient tool. However, my use of Quicken is just to register all the transactions. I don’t rely on it to, for example, to know how much return I have received from my investments because I found that Quicken treats reinvested dividends and capital gains as costs instead of gains. Therefore, the return Quicken provides doesn’t reflect the real performance of my investment. While distributions eventually increase the cost of investments when it comes the time to sell because they have already been taxed, it doesn’t help me in determining my personal return on investment (PROI) at present time.
So in addition to Quicken, which is for the only purpose of tracking transactions, I also use Excel spreadsheet to calculate my actual returns. And since I do dollar-cost averaging throughout the year, the returns from the fund’s annual report or from website like Morningstar, aren’t really what I got for my investments. The following is an example to show how to calculate my 2010 PRR of my investments in Dodge & Cox Stock Fund (DODGX), which I own since 2002 and have been dollar-cost averaging monthly since.
Account activities for Personal Rate of Return (PRR) calculation
Date Activity Invested
12/21/2010 Dividend Reinv. $39.63 $107.64 0.368 152.801 $16,447.50 12/31/2009 None $0 $96.14 0 138.627 $13,327.60 01/05/2010 Purchase $100 $98.16 1.019 139.646 $13,707.65 02/05/2010 Purchase $100 $93.07 1.074 140.720 $13,096.81 03/05/2010 Purchase $100 $99.41 1.006 141.726 $14,088.98 03/26/2010 Dividend Reinv. $48.19 $101.59 0.474 142.200 $14,446.10 04/05/2010 Purchase $100 $104.01 0.961 143.161 $14,890.18 05/05/2010 Purchase $100 $100.93 0.991 144.152 $14,549.26 06/07/2010 Purchase $100 $90.10 1.110 145.262 $13,088.11 06/25/2010 Dividend Reinv. $49.39 $92.12 0.536 145.798 $13,430.91 07/06/2010 Purchase $100 $87.62 1.141 146.939 $12,874.80 08/05/2010 Purchase $100 $95.86 1.043 147.982 $14,185.55 09/07/2010 Purchase $100 $92.31 1.083 149.065 $13,760.19 09/27/2010 Dividend Reinv. $43.23 $96.86 0.446 149.511 $14,481.64 10/05/2010 Purchase $100 $98.88 1.011 150.522 $14,883.62 11/05/2010 Purchase $100 $104.89 0.953 151.475 $15,888.21 12/06/2010 Purchase $100 $104.38 0.958 152.433 $15,910.96
As you can see from the above table, not only I recorded regular purchases that I made throughout the year, but also dividend distributions that were all reinvested.
At the beginning of 2010, I had a total of 138.627 shares at $96.14 per share. The total market value of my investments at that time was $13,327.60. Throughout the entire year of 2010, I basically purchased $100 of the fund every month using their automatic investment plan. Every time when a purchase was made, I calculated the following:
- Shares added: This is the number of shares purchased each time. For example, on 01/05/2010 I bought $100 of DODGX and the transaction added $100/$98.16 = 1.019 shares.
- Total shares after the transaction: The above purchase increased the total number of shares I owned at the end of 01/05/2010 to 138.627 + 1.019 = 139.646 shares.
This process continued each time shares were purchased. Actually, since many mutual fund companies allow me to download transaction history into Excel, the calculation is much easier and just needs to be performed once a year in order to figure out the PRR of the year.
Reinvested Dividend and Capital Gain Distributions
In addition to regular purchases that I made every month, DODGX also makes quarterly dividend distributions. Since I don’t take any distribution as cash, all the dividends and capital gains are reinvested automatically which, in turn, increase the number of shares I own, as you can see from the above table. And these extra shares will continue to generate more dividends and capital gains in the future, with increasing impact on the overall returns.
Personal Return on Investment
With the regular purchases and purchases made from distributed dividends, the total number of shares I own at the end of 2010 increased to 152.801, a net addition of 14.174 in year 2010. Before calculating my personal rate of return, I need the total market value of my DODGX investment at the end of 2010, which was at $16,465.84. For the year, the net change of the market value of my investment was $$3,138.24, of which $1,200 came from my own contributions made throughout the year. That means only $$1,938.24 was due to the appreciation of DODGX share price. Thus, my personal rate of return for 2010 is
PROI = ($3,138.24 – $1,200) / $13,381.66 = 14.48%
PROI and Total Return
If you check Moringstar’s data, you will find that the total return of DODGX in 2010 is13.49%. How could my PROI be nearly one percentage point higher than the fund’s total return? The 13.49% total return is calculated based on the assumption that no additional purchase was made throughout the year (here’s my explanation of total return). If I didn’t make any additional purchase in 2010, then share additions would only come from reinvested dividends. In that case, I would have a total of 140.451 shares at the end of the year, all from four quarterly dividend reinvestments, and the total market value would be $15,135.00 instead of $16,465.84 that I actually had at the end of 2010.
Now, if I use $15,135.00 as the total market value at the end of the year, I can calculate the total return of 2010 as
Total return = ($15,135.00 – $13,327.60) / $13,327.60 = 13.56%
which is much closer to the total return from Morningstar (but I haven’t figured out why there’s still such a small difference).
Power of Dividend Reinvestment
For those who depend on fixed income, dividends could be a significant source of income (that’s why I am also focusing on increasing my passive income, which is in the form of dividends, when selecting what to invest now). However, since I am still in the accumulation stage, I don’t take out any distribution. Instead, I have them all reinvested as long as dividend/capital gain reinvestment is an option. For mutual fund companies, dividend reinvestment is usually offered for free. But if a dividend paying stock or ETF is held at a brokerage firm like Scottrade, then distributions are distributed as cash because Scottrade doesn’t reinvest dividends from stocks/ETFs.
As you can see from the above calculation that even though I dollar-cost averaged in an upmarket (DODGX share price went from $$96.14 to $107.76 in 2010), my PRR is still nearly1% higher than the fund’s total return. Where did this extra return come from? Well, it is solely due to additional shares purchased before dividend distribution date, which actually increased the dividend payouts afterwards and allowed the number of shares from each reinvestment to increase, though maybe just a little bit (check out more details on DCA and dividend reinvestment). Overtime, as I keep adding shares through DCA, the contribution from the reinvested distributions becomes more and more significant in terms of the overall returns. Thus, in the accumulation stage, reinvesting all the distributions is a better strategy for the long term growth of investments.
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