Calculating My Personal Rate of Return

I have been using Quicken to track my investments for many years and feel it’s a very convenient tool. However, the biggest problem I have with Quicken is that it treats reinvested dividends and capital gains as costs instead of gains. While this is true when it comes the time that I sell the investment if I sell it at all, it doesn’t help me in determining my personal rate of return (PRR) at present time. What I want is including all distributions as gains (they are realized gains from my investments after all).

So in addition to Quicken, which is for the only purpose of tracking transactions, I also use Excel spreadsheet to calculate my actual returns. Besides, since I do dollar-cost averaging throughout the year, the returns from the return from the  fund report isn’t really what I get. The following is an example of the spreadsheet that I use to calculate my 2006 PRR of Dodge & Cox International Fund (DODFX).

Regular purchases

At the beginning of 2006, I had a total of 305.349 shares at $35.02 per share. Through out the year, I bought $100 of the fund on average every month and each time I made a purchase, I calculated:

• Shares added: This is the number of shares purchased each time. For example, on 01/31/2006, $100 got me $100/$37.32 = 2.68 shares.
• Total shares: The above purchase made the total shares I owned on 01/31/2006 at 305.349 + 2.68 = 308.029 shares.

The process continued each time shares were purchased.

Reinvested distributions

I don’t take any distributions as cash. Instead, they were all reinvested which, in turn, added more shares to my possession. And these extra shares will continue to generate dividends and capital gains in the future, with increasing impact on the overall returns.

On December 28, 2006, DODFX distributed dividend and short-term (ST) and long-term (LT) capital gains of a total $1.18 per share. At that time, I have accumulated 333.795 shares from regular purchases and the reinvested distributions gave me 333.795 * $1.18 / $43.62 = 9.03 shares.

Personal rate of return

At the end of 2006, the total shares I own increased to 345.114 as compared to 305.349 when the year began. The market value of my investment changed from $10,693.32 to $15,067.68. Of the $4,374.36 market value increases, $1,200 came from my own contribution. Thus, my personal rate of return for 2006 is

PRR = ($4,374.36 - $1,200) / $10,693.32 = 29.69%

Quite impressive

PRR and total return

If you check Moringstar’s data, you will find that the total return of DODFX in 2006 is 28.0%. How could my PRR be higher than the total return? The 28.0% total return is calculated based on the assumption that no additional purchase is made throughout the year (here’s my explanation of total return). The 305.349 shares remained the same until December 28th when distributions were made and the total shares after the distributions were 305.349 + 305.349 * $1.18 / $43.62 = 313.609. Now I can calculate the total return as

Total return = (313.609 * $43.62 - $10,693.32) / $10,693.32 = 28.04%

exactly the total return from Morningstar.

The value of dividend reinvestment

As it turned out that though I dollar-cost averaged in an upmarket (DODFC share price increased from $35.02 to $43.66), my PRR is till 1.65% higher than the total return. This extra return is solely due to the reinvested distributions from the additional shares bought priori to the payout. (check out this post for more details on DCA and dividend reinvestment) And as I keep adding shares throughout the year, the contribution from the reinvested distributions becomes more and more significant in terms of the overall returns. Thus, at the accumulation stage, reinvesting all the distributions is a better strategy for the long term growth.

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