Back in the 1980's there was an old public service commercial that said, “Do you know where you’re children are?” In today’s society with cell phones and modern technology, knowing where they are at isn’t much of an issue any more. Unfortunately, technology doesn’t let you know exactly what they are doing, which can be an issue!
For most individual investors, they know where their securities are at, but they don’t know what those securities are doing. In other words, they don’t know their true rate of return (ROR). Sure, they can do simple rate of return calculations based upon beginning values and ending values, but that doesn’t account for additions to and redemptions from a portfolio. Additionally, it ignores dividends received, the timing of cash flows and the trend of returns. All of these “flows” can have a significant effect upon the returns of a portfolio and its securities.
Years ago, I was at Rite Aid when we had three financial restatements. The systems they had were basically FUBR (F__ked Up Beyond Recognition). I spent many a day building desktop and distributed databases to provide visibility into financial metrics and processes. After all, if you can’t see where you’re at now, how can you expect to get where you want to go?
Visibility in determining investment returns is the same as the problems that were so pervasive at Rite Aid. You wouldn’t expect to drive a car somewhere if you were nearsighted and didn’t have your glasses on. You might very well crash or end up somewhere where you don’t want to be. The same goes for seeing where a portfolio is at and is going!
Institutional investors have great systems to perform rate of return calculations for their use, but most individual investors lack this capability. While some investment houses provide this calculation, they only provide it for a single point in time and they don’t show it to their investors over a time continuum. I imagine the investment houses wouldn’t want investors to see this as the poorly managed accounts would flee. If it was easy for individuals to calculate ROR and be able to SEE rates of return over an extended time continuum, investors would be better able to see if they were “on target”.
Rate of return calculations are complex and programming them can be daunting. For example, if an investor holds a lot of individual bonds, the prices of bonds may not be available each day. The process also requires a centralized database, daily collection of portfolio inflows and outflows, and daily security prices.
To get a true handle on portfolio rates of return, knowing the ROR is essential. Improvement by only a single percentage point of return over long periods can mean the difference between a great retirement and scruffing along in retirement.
I constructed a personal database for exactly this reason 25 years ago and it has been a godsend to keeping me on track. While I am not marketing it commercially, I would encourage individual investors to seek a way to find out their ROR's on a regular basis that can be seen OVER tme . It has made a huge difference for me! A description of my ROR database it is under projects on my linked in page.
Isn’t the goal of a great retirement enough reason to put your glasses on so you know where you’re at? Time is your friend early in your career, but it can work against you later on. Get started looking into finding your rate of return over time. A good place to begin is to start by investigating time rates of return versus money rates of return.
Do you know where your portfolio is at!
