Smart Investing

As we head into September and year-end will be here before you realize it, you may be wondering how you're doing performance wise. While I'm not a big advocate of looking at your performance more than once a year, I understand the curiosity of where your portfolio stands now.

I have been comparing my performance to potential new clients considering moving their money to Wilsey Asset Management, and I'm happy to report that no has yet had better performance -- even with my more conservative investment style. But what I'm learning is, some have a hard time computing or understanding total return. To make the situation more complicated, some brokers are reverting back to their old tactics to try and show that they have better performance.

Let's first discuss how to figure total return and I'll use the S&P 500 as an example. When the S&P 500 opened for the first day of 2009 the opening price was 902.99. Using the closing price for July 31, 2009, the last trade of the day was 987.48. The difference of 84.49 is the total increase in points. If you divide the 84.49 by what the value was at the start of the year (902.99) you will get a total return of 8.55 percent.

On your own investment account, you can do the same thing: Take the value at the beginning of the year, find what the current value is now or for the period you want to look at, and subtract the beginning value from the period end value -- and that will provide a total gain. Divide your total gain by the beginning value for a total return percent.

What is the old tactic that brokers are using? They will just figure the total return on the equity portion of the portfolio. For example, let's say you have a $100,000 portfolio and it is 40 percent in equities. Due to the recent rally in the market, the equities have done quite well. What the broker will focus on is how well that 40 percent in equities is doing, saying you are doing great and are up 20 percent.

While this is correct, it is not the whole story. Your 40 percent in equities has delivered $8,000 in a dollar return but one should look at the total return of the portfolio -- don't forget how the other 60 percent was invested.

I never use this smoke and mirrors type of return. I always quote the total return of the portfolio, whether I have 80 percent invested or 40 percent invested. What is important to know is what the return is on the entire portfolio, not just a portion or what is doing best.

So you may be wondering what was the real return on the entire portfolio. Here are the numbers: The equities gained 20 percent or $8,000, and I'll assume the balance of the portfolio was in cash and had a zero return. Keep in mind the other 60 percent could have been losing money, which would drag down the total return even more and which the broker may want to hide. But using our new formula, we know if we divide the $8,000 by the $100,000 the total return on the portfolio is only 8 percent; while positive, not nearly as exciting as the 20 percent gain you may have thought you had.

Don't be fooled, compute your total return numbers to know where you stand, good or bad.

If you are adding to or taking money out of the portfolio, this will change the dynamics of how to figure total return. If you add money to the portfolio, you don't want to include that in the gain, nor should you penalize the portfolio if you have taken money from the portfolio. If you are doing this, it does complicate the process of figuring total return. If you're sharp with an excel spreadsheet and you have the right formula, you can get the number. If not, you can use averages of deposits or withdrawals, which will not give you an exact return number but it will give you a general idea. Keep this in mind when comparing your performance to indexes or other return figures for other portfolios, your return number may be off by a percent or two -- no way to know for sure.

Check your performance or ask your adviser where you stand, especially now that you can ask the right questions. Once you get your curiosity out of the way, wait until the first of January to see your performance for all of 2009. I hope you will be as happy as I expect to be.