How do you calculate an annual return on a stock portfolio if you have made contributions to it?

Question

The problem is that the contribution may occur not at the beginning of the year...so to account for that, Is this correct?

I create an average base.

So for instance I beging January with 1,000.

if I contribute $100 in february, I multiply that by 11/12 to get 91.67

So at the end of the year I take my account balance, lets say 2,000 and perform these calculations:

(2,000-(1,000+91.67))/(1,000+91.67)) = 83%

Is there a better way of evaluating the annual return?

Answer 1

You method will work fairly well. If you can find per share prices for your investments, you can directly calculate the returns for each investment.

Answer 2

There is a difference between an ANNUAL rate of return on something (bond, CD, etc.) and a PERSONAL rate of return on your investment. Typically, the investor in a stock portfolio is more concerned with the latter. (Not to detract from the former, but annual rates of return on stocks are published openly in various locations and would apply to anyone owning that stock (or mutual fund, whatever).
So, my point is, for your PERSONAL return, it's very simple, and can be done at any time, not just the end of a year. Simply total all your contributions, whenever made, and subtract them from your current value, and divide the difference by your total contributions.

Example: Original investment $1000 in January. Add $100 every month after till the end of the year. Total contributions = $2100. Assume account market value at year end = $2500.
Then market value change $400 divided by total investments $2100 = return of about 19%.

If you feel you need to figure things out on an annualized basis, then your original approach is on the right track. But what if your additional contributions occur on different days in the succeeding months?. Or occur more than once in the same month? Or skip months here and there? Or occur in differing amounts? Then you have to prorate using a 365 day method. Most investors find this too complicted for the effort, although there are programs that can do it for you. Some investment companies provide such tools on their websites.

Hope this helps.

Answer 3

Yeah.

Answer 4

You take it item by item and you calculate approximately. It is hard work.