Thanks to all of you who wrote to me following my column on the inadequacy of platform tools for measuring investment performance (IC, 4.02.22). Nearly everyone who wrote in monitors their portfolios' performance via their own spreadsheets, logging investment decisions and comparing returns against a chosen benchmark.
One reader, who uses Hargreaves Lansdown and interactive investor, updates the spreadsheet on a monthly basis factoring in cash added to or withdrawn over the month. He is content to ignore the time value of inflows as he does not believe that this makes a big difference.
Another reader works out the profit and loss of each of his holdings for the previous year, including dividends received, at the start of every year. “This helps to highlight the decisions I made during the year,” he says, adding that it can take him a day or two so it would be good if there was a better tool with which to track performance.
For venture capital trust holdings, one reader schedules monthly dividend cash flows in an Excel file and uses the internal rate of return (IRR) function to get a single annualised return over the whole period of ownership. IRR can be calculated for a series of cash flows that occur at regular intervals, but the calculation assumes that the time between all dividend payments is the same.
You can measure ‘time-weighted’ performance, which accounts for money going in and out of your account on an irregular basis, fairly easily by unitising your portfolio in an Excel file. You do this by calculating the performance for each time period between when you add or withdraw money from the account. You then add one to each performance percentage, multiply them all together and subtract one again.
Another reader noted that the trouble with using Excel files is that you have to manually enter many data so there is a high possibility of making mistakes. He thinks that most people would be better off just having a £100,000 theoretical amount which roughly represents their portfolio with no money going in or out. And they could track this using the SharePad platform which accounts for dividend payments.
Other tools include the IC’s own portfolio tool. Trustnet, meanwhile, is free and enables you to compare a wide range of funds and sectors. And setting up an account on the Association of Investment Companies’ website is a great way of monitoring investment trusts, again for no charge.
One reader asked if it matters if investors don’t monitor their performance. “Perhaps they don't want to know how much more successful they might have been if someone else managed their portfolio," he says. "If it meets their goals, isn't that sufficient?”
Who am I to judge? But as the purpose of investing is to preserve and grow wealth it follows that most investors would benefit from monitoring their returns.
However, another reader said that his financial adviser reviews his pension annually while he looks at his other investments every week. And he has come to the conclusion that there is a lot of truth in Aesop's Fox and Cat fable or 'paralysis by analysis'. A frequently cited psychological trap that investors can fall into is the endowment effect, whereby they place too much value on what they already own and fail to act when they should.
Studies also have shown that trying to time the market can be a futile pursuit which racks up costs.
