Calculating Portfolio Gains

QUESTION: When you enter data into your Excel spreadsheet for your portfolio, do you include the commissions in the purchase prices or just the bid price and quantity?

ANSWER: Yes, the commission, or any other fee charged by the broker, is added to the cost, and the total becomes your cost basis for tax purposes, and portfolio return purposes. Likewise when you sell, the commission and other fees are deducted from your sale proceeds, the result being your sales price for tax purposes and portfolio return purposes. 

QUESTION: Also, when you calculate your monthly gains, do you include commissions and dividends?

ANSWER: Yes, but they take care of themselves automatically. Here's why. For any period of time you select, investment return equals: market value of the total portfolio at the end of the period, divided by market value of the total portfolio at the beginning. I express the result in numeric terms using 4 decimals (not percentage). My period selected is monthly. If the portfolio went up, a given month might be 1.0435. If it went down it might look like .9756. I calculate this every month, then all you have to do to get year-to-date is multiply all the factors together for all months of that year-to-date. For the above two months, the performance would be .9756 times 1.0435, or 1.0180. At that point I convert to a percentage to report in the letter, +1.8%. Next month you take the 1.0180 and multiply by the factor for the next month for a new year-to-date performance.

OBSERVATIONS: This is an extremely simple approach, as any income received, or any sales made, automatically increase cash, and any purchases made automatically decrease cash, but it only works if the portfolio is a closed system, meaning no new money added to the portfolio and no money withdrawn from the portfolio during the period. If either of these events occurs during the period, you adjust the beginning of the period total market value (add in new money invested, or subtract money withdrawn) before making the calculation. Once a 4-decimal result is obtained for a given month, it never changes, and you can use it in the future to calculate results for any number of periods, for any size portfolio, etc.

If the time period selected is more than a month, some people like to use beginning of period and end of period average of the total market value in the denominator, rather than beginning of period total market value, to get a little more accurate performance. In fact you can even do that on a one month period. I use beginning of the month.

The contents above were taken from an e-mail Jay O'Keefe sent to answer questions from Ted Spaeth.