New Tracking Method

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: