ALEXANDRIA, VA (Dec. 24, 1997) -- Being what my wife affectionately calls a numbers geek, I am fascinated by strange things. For example, my other computer is right now flipping a coin 10,000,000,000 times in sets of 100 to find out how many sets, or how many sets of sets, or how many sets of sets of sets it takes to revert to a perfect 50/50 chance. This love of numbers makes me want to know how I am doing in my portfolio performance with some measure of accuracy. Since I don't get to run my investing life 10,000,000,000 times over to make sure I get it right, I have to know along the way so that I can learn from my mistakes and get it right the first lifetime through.
Like you, though, my portfolio doesn't work the way the Fool's Portfolio worked. On that lonely day back in August 1994 when the brothers Gardner put in their $50,000, they began a daily, relentless tracking of themselves against the market. Since they never add or subtract money from the portfolio, though, it's a pretty easy portfolio to track. Everytime they tack another $5,000 on to their bottom line, it adds 10% to the original portfolio value.
It's not like that with me. It's probably not like that with you. It's certainly not like that with the Drip Portfolio.
This portfolio began with $500. That means that the monthly addition of $100 (every month on the 15th) adds another 20% to the original value. You don't, however, want to credit these portfolio managers with a 20% month over month gain, do you? (Heaven knows I don't. Imagine Jeff strutting around the office boasting of that kind of investment performance.) Instead, a way has to be devised to track the portfolio, including the new money that trickles in, giving fair value to actual portfolio performance.
Fortunately for us, we didn't have to make this new and improved method up. It's been in use for years by the good folks who run mutual funds. These people have to deal every day with cash inflows and outflows and have it down to a science. What they do is divide their entire portfolios into bite-sized pieces called shares (or units, sometimes). When you send Joe's Mutual Fund $100, Joe takes the entire value of his fund as of that day, divides it by the total number of shares he's already sold to come up with a Value Per Share (also called an NAV for Net Asset Value). He then sells you however many shares your $100 will buy at that Value. The day you decide you want some money back, Joe will punch up on his calculator the total value of his fund, divided by the number of shares he's sold, and come up with a Value Per Share. He'll then give you that much money for each share you sell back to him.
I'd recommend you do the same thing with your portfolio. We do with the DRiP Portfolio. Every month when we add money, we figure out what the value of the Portfolio is, how many "Shares" we have bought so far, and divide them to get the current Value Per Share. Then we use that number to buy new shares with our $100.
By doing this, we assure ourselves that this new $100 doesn't add itself to our investment returns, since the Value Per Share before and after the addition doesn't change. The other thing we assure ourselves is that that $100 starts pulling its weight right away.
Let me use bigger numbers to illustrate this last point. Let's say we had a $10,000 portfolio. If it grew $2,000 to $12,000, we'd have a 20% return. Instead of growing, however, if we just added $10,000 in cash, it'd now be a $20,000 portfolio, no growth, right. (I am right on this, I assure you ;-) ). Now if our $20,000 grew $2,000, it would no longer be a 20% growth, it'd only be 10%. We expect that new $10,000 to do something as well.
Ok, come back now... enough of the numbers. You don't (probably) want to crunch all of these by hand. It's not that difficult, but it is time consuming. What you really want to do is set up a spreadsheet which lists for you your current stocks, your current portfolio value, divides your portfolio into a certain number of shares, and computes a value per share. That way, when the values of your stocks change, you can see how that affects your Value Per Share, and thus your portfolio performance. When you add money, you add the right number of shares at the right value. When you subtract money, well, you get the idea. If you don't feel like constructing one yourself (shameless commercial pitch about to occur) it so happens that we sell one called PortTrak. Without sounding like an infomercial, it is (to the best of my knowledge) the only Portfolio tracking software available which works on a Value Per Share basis. (It's also rather useful to DRiP types because it keeps track of all of those fractional shares which will one day have to be reported to the IRS.)
Don't worry if it all wasn't crystal clear. From time to time we'll readdress this issue from different angels until it's almost second nature to you. Meanwhile, I've added another Billion coin flips to my total... another thing you might not want to try doing by hand.
Do your Foolish gift shopping now, in time for the Holidays. And consider the Fool's Industry Focus '98 book -- to learn not only about industry-leading stocks, but about the industries in which they operate as a whole -- and see which one company in each industry that our news and analysis team favors most.
Day Month Year History Drip (0.07%) (4.78%) (14.91%) (14.91%) S&P 500 (0.68%) (2.38%) 25.91% (1.96%) Nasdaq (0.69%) (6.31%) 16.15% (5.92%) Last Rec'd Total # Security In At Current 12/01/97 6.082 INTC $81.346 $70.250 11/14/97 1.000 JNJ $62.125 $65.063 Last Rec'd Total # Security In At Value Change 12/01/97 6.082 INTC $494.72 $427.24 ($67.48) 11/14/97 1.000 JNJ $62.13 $65.06 $2.94 Base: $900.00 Cash: $389.75** Total: $885.93 The Drip Portfolio has been divided into 41.647 shares