Using NAV to calculate portfolio performance

[thinknotleft]

Two links on XIRR

https://spreadsheets.google.com/pub?key=...vCZfiXjzfQ
http://blog.iii.co.uk/returnagain/

[yyt]

I would like to consult in the other case...where one has a "full stock portfolio", no holding cash,
Trying to work out the sums but it did not really make sense. Would be grateful if anyone could point out my error.

End of Month 1
Bought $15,000 of A
A : $15,000
#of units : 15,000
NAV : $1

Month 2
Point when purchasing $18,000 of B
A : $14,000 (dropped by $1,000)
#of units : 15,000
NAV : $0.9333

B : $18,000
Additional of 18,000/0.9333 = 19,285.78units
Total # of units : 34,285.78units
NAV : $0.9333

End of Month 2
A : $14,000
B : $20,000 (appreciated by $2,000)
NAV : ($14,000+$20,000)/34,285.78 = 0.9917

I have a qn then. Looking at total returns, we have a +$1,000 return at the end of Month 2 right ($34,000 - $15,000 - $18,000)?
But the NAV reflects that there's a loss of 1%? How is this re-conciled?

[d.o.g.]

I have a qn then. Looking at total returns, we have a +$1,000 return at the end of Month 2 right ($34,000 - $15,000 - $18,000)?
But the NAV reflects that there's a loss of 1%? How is this re-conciled?

NAV takes into account the fact that different amounts of money were at work for different amounts of time.

In month 2 the loss was 6.7% ($1k/$15k).
In month 3 the gain was 6.25% ($2k/$32k).

Compounding the 2 returns results in a final net decrease in NAV. Essentially you bought more units when the NAV was down, so even before NAV had returned to the original $1 you had already made some gains. This is equivalent to averaging down - your average cost goes down so you break even and start making money at a lower price point.

[changwk]

hi d.o.g,

you mentioned before that dividend is equivalent to a share sale.
but using that calculation, the NAV still remains the same and no of units decrease.
getting a dividend will decrease my per share cost. but how does NAV account for that?
treating dividend as a share sale does not show up any positive impact to the NAV.

[d.o.g.]

you mentioned before that dividend is equivalent to a share sale.
but using that calculation, the NAV still remains the same and no of units decrease.
getting a dividend will decrease my per share cost. but how does NAV account for that?
treating dividend as a share sale does not show up any positive impact to the NAV.

If the fund is considered to be 100% invested all the time, then dividends must be treated as a sale of units. Since the sale is at NAV there is no change to NAV.

HOWEVER you must calculate the NAV on the day the shares go ex-dividend. Effectively, on that day, your fund consists of shares + cash, and you need to value the total to get the NAV per unit. Then you reduce the number of units to reflect the fact that the cash is being removed from the portfolio. You need to calculate NAV every time you put money in or take money out, whether this is from new purchases, sales or dividends.

The "dividends decrease your per share cost" effect is reflected in your decreased cost for the entire portfolio.

[csl123]

On a similar note, Margin Interests is considered as purchase of units.

[Temperament]

Ah.........
Maths is really headache for some people; it's definitely for me. Fortunately, there are a lot of soft-wares in the markets helping (stupid) people like me. Just make sure every types of transactions regarding shares are entered correctly. i not sure the software i am using is really good or not but one thing i am sure is i see my assets increasing yoy. i use it since day one.

In fact software can track anything regarding $$$.
i only learn or interested to use for tracking share portfolio and assets.
Don't ask me how good is the software i am using. i am using it at my own risks. Ha! Ha! Just like buying shares at my own risks.
As i have declared, Ah......... maths

[changwk]

hi,

thanks to d.o.g for the explanation.

i have spent the last few days calculating my NAV. it was tough initially because i was new to the process. I decided to start the calculation from 2011. i used end of 2010 portfolio value as my base. So i had to back track all calculation for every transaction (buy, sell, div) from 2011 onwards.

once the hard part is done, the future entries should be much easier and faster. it's good to know your investment performance by looking at the NAV.

[changwk]

hi,

I have a clarifying question. Let's say that in a particular day, you have multiple transactions eg multiple sells, buys and div to account for in the NAV calculations.

For example, I have 2 sell transactions in day X. what should be the method to calculate the NAV?

Step 1: get new portfolio value at end of day X
Step 2: include stock A into the NAV
Step 3: add stock A to the portfolio and get new portfolio value
Step 4: include stock B into the NAV

OR
Step 1: get new portfolio value at end of day X
Step 2: include stock A+B into the NAV

Both methods will give you a different answer.

[d.o.g.]

I have a clarifying question. Let's say that in a particular day, you have multiple transactions eg multiple sells, buys and div to account for in the NAV calculations.

For example, I have 2 sell transactions in day X. what should be the method to calculate the NAV?

Step 1: get new portfolio value at end of day X
Step 2: include stock A into the NAV
Step 3: add stock A to the portfolio and get new portfolio value
Step 4: include stock B into the NAV

OR
Step 1: get new portfolio value at end of day X
Step 2: include stock A+B into the NAV

Both methods will give you a different answer.

There seems to be some confusion. NAV is calculated BEFORE any transactions occur. All the transactions are netted off in dollar value, then the net amount is applied to increase/decrease the number of units.

So you calculate the NAV first, then you adjust the number of units.

Worked Example:

Portfolio Value at day end (BEFORE any transactions): $10,000
Number of Units: 1,000
NAV per unit: $10.00

Sell Transaction #1: $5,000
Buy Transaction #2: $2,000
Net Transactions: -$3,000

Change in Units
= -$3,000 / $10.00
= -300

New number of units
= 1,000 - 300
= 700

The next day, the portfolio value is calculated again, this time with the revised stock list.