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Wednesday, March 19, 2008

* How To Increase Your Portfolio's Return

There is a way to increase your portfolio's calculated total return. In some cases this trick will double, triple, quadruple or increase it by even more. It is a simple trick that you may already be doing because it is easier to do than not. What is this trick? Not counting your sales/losses in the calculation of your total return.


This is NOT a trick that I employ. I do not think it is appropriate to pull out sales/losses when calculating total return. By not counting the results in your portfolio you are saying in effect 'I do not like the outcome, therefore I am no longer recognizing the existence of that transaction.' Just to be clear, I never remove sales losses from my portfolio, even when rolling to a new year.

As mentioned in "5 Lessons Learned About Investing", when I started dividend investing I went after yield and made some very poor decisions. Now I have to look at the losses every time I review my portfolio. For example, the biggest biggest dollar loser in my dividend portfolio is a mortgage REIT, NovaStar Financial (NFI). I bought it in 2005 for $133/share (reverse split adjusted basis), added to my position in 2006 at $120/share and sold it an enormous loss in 2007 at $20/share. It is now trading for about $2/share. Over the period I owned NFI its annualized return to me was (-57%).

I am a highly competitive person and I want to beat my benchmark. However, I want to do beat it fairly on a level playing field. Keeping the sales/losses in my portfolio is a reality check for me. If I can't beat my benchmark over time, I will concede and buy it.

Tomorrow, I will discuss some of the tools I use to calculate returns for my portfolio.


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