DRIP PORTFOLIO
New Tracking Method

Drip Port has always used a "value per share" tracking method to measure its performance. This is the method that mutual funds use and that most portfolios use if they add money regularly. However, beginning today, we're using a more conservative tracking method -- simply, a "comparable S&P 500" method. With this method, we assume that every dollar put into a Drip could have been put into the S&P 500, and so we track against that potential return staight-up. One aim: to beat the S&P 500, of course.

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By Jeff Fischer (TMF Jeff)
November 8, 2000

The votes have been counted and the decision has been made: change is upon us. No, I'm not talking about the amazing presidential election. (Who else was up all night watching!? Tom Brokaw, way to stay alert!) I'm talking about the Drip Portfolio's tracking method. Since our beginning in 1997, we used a value per share (VPS) method to track our return. Value per share tracking is what mutual funds use. This method of tracking is often employed when you add new cash regularly to a portfolio, as we do.

A few weeks ago, the Rule Maker switched to a tracking method that more closely and more simply tracks a port's return against the S&P 500. Now the Drip Port is moving to this method, too. Why? Because, despite its many good points, value per share tracking can overstate a portfolio's returns, and we want to be as conservative as possible in stating our returns. We have always done that.

All of our tracking programs are created in-house, at Fool HQ. Three years ago, value per share was the best system we could create, and it fit us well because it is widely used in the investment community by any portfolios that add money. But now we're able to improve beyond the value per share method.

How does the new tracking work? Simple.

The Rule Maker's Matt Richey explained this when Rule Maker made the switch: "As soon as we deposit fresh cash into our discount brokerage account [in Drip's case, as soon as we add cash to the Port's holdings], the clock is ticking. That money now represents opportunity -- the opportunity to achieve a return on investment. One choice is to mindlessly replicate the S&P 500's return by investing in Standard & Poor's Depositary Receipts (AMEX: SPY). [Comparing to this index tracker]... is a direct, apples-to-apples comparison of our overall return versus what we would've achieved if we'd invested every dollar (on the day of deposit) in the S&P 500."

So, this is what we're doing with our new tracking method. Rather than divide our portfolio into "shares" (the way a fund does) and assign a value to each new share each time we add money to the port (the way value per share does), we are simply comparing ourselves to the S&P 500 straight up, one-on-one, without extra math. The value per share method worked well for us, but by design influenced our near-term returns. There is no way to avoid that with the method. Here are Drip's approximate returns as of yesterday's close, under VPS tracking:

Week    Month      YTD     Since 7/28/97   Annualized
0.70%   0.88%     19.51%      55.26%         14.34% 

And here are our returns under the new method:

Week    Month      YTD     Since 7/28/97    Annualized
0.70%   0.87%     15.45%       38.72%          10.48% 

Comparable S&P 500             24.40%           6.88%
As you can see, our return since inception declines significantly in the new method. That's understandable. The value per share method measured out a better return for us due to Intel's strong early performance. Our comparable S&P 500 method removes that value per share influence and keeps our return straight-out.

You see below that the port is worth about $5,970 (as of Tuesday). We've only invested about $4,400, so we've netted about $1,570 in gains. (These dollar numbers and all others in the port are the same, of course. Only the tracking method is changed.) These dollar amounts show about a 38% return, just as our new method shows.

There is nothing wrong with the old value per share method. It is used by thousands of mutual funds today. But, in the short term especially, it can overstate your performance, often without you even realizing it (scary that so many mutual funds use it), and we want to use the most conservative method possible. Now that we have a more conservative method available, we're using it.

This change might make it look as if we now have more of an upward climb until we make our 20-year goal, but that's not true. Our goal has always been $150,000, and our dollar amount in the port (about $5,900) has not changed a whit. Additionally, this new method shows how we're beating the comparable S&P 500 (38% to 24%), while the old method lacked this exact comparison.

I realize that tracking methods can be confusing (that's why I have nothing to do with creating 'em -- instead, we have smart Fool techies writing the software), so if you have any questions about this change, please visit the Drip Basics board for discussion.

Fool on!

Jeff Fischer, TMF Jeff on the boards.

Drip Portfolio


11/8/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
CPBCAMPBELL SOUP0.250.81%30.94
INTCINTEL CORP(3.50)(7.58%)42.69
JNJJOHNSON & JOHNSON1.311.42%93.44
MELMELLON FINANCIAL CORP(0.75)(1.56%)47.19
PEPPEPSICO INC0.250.53%47.38

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip(2.91%)(2.23%)(2.07%)12.09%34.68%9.49%
Comparable S&P 500n/an/an/an/a22.43%6.35%
S&P 500(1.58%)(1.22%)(1.41%)(4.08%)50.12%13.16%
S&P 500 (DA)(1.55%)(1.20%)(1.38%)(4.01%)52.74%13.76%
NASDAQ(5.39%)(6.37%)(4.09%)(20.58%)105.90%24.59%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
9/8/9748.4286INTC23.7642.6980.01%
10/7/9837.3159MEL34.7747.1937.19%
11/14/9715.694JNJ79.6993.4418.53%
7/28/005PEP48.0047.38(1.30%)
4/13/988.403CPB53.9830.94(41.13%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
9/8/9748.4286INTC1,150.432,067.30920.46
10/7/9837.3159MEL1,297.431,760.84482.49
11/14/9715.694JNJ1,250.711,466.41231.76
7/28/005PEP240.00236.88(3.13)
4/13/988.403CPB453.61259.97(186.57)
 
Cash: 
Total: 
Unchg.
5,791.39
 


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.