Ask Colin

Should you track the compound annual return for each stock in your portfolio?

The detailed question was:

I note that you show an absolute return percentage for each equity held. This does not however have a time component applied to it, as a CAGR calculation would. Do you see any benefit in this? I have been doing it and it helps me assess whether to maintain a position if the CAGR falls below say the term deposit rate. Of course this is only in conjunction with other signals/indicators.


I have given this issue a great deal of thought. There are many different ways to approach it. In the end I have decided that what I am doing now is probably the best approach. Let me explain:


My investment objective is a rate of return for a portfolio of investments in companies plus a cash reserve. My portfolio summary spreadsheet captures the portfolio’s total return each year and I track that against my cumulative target total return and also the accumulation (total return) index.


All investments do not perform at the same speed, even if they all  grow their earnings each year. Those that do not grow earnings satisfactorily are sold when they hit their stops. Those that do grow their earnings are built from an investment of 2% of capital to an investment of 6% of capital over time. The really successful ones require a rebalancing of my portfolio diversification, so I take profits progressively.


Since all investments do not unfold at the same rate, there is a necessity to have patience with those that are not failing, but also maybe in a slow patch. As a part owner of the business, I don’t see it as being sensible to sell them just because their growth rate is uneven or in a slow patch compared to other stocks in the portfolio or to the index. It is the nature of the investment process that this will happen.


Of course, sometimes I am fully invested and may chance upon a new stock that seems a better prospect than one I have. In that case, I may switch part or all of my exposure from an existing investment to a new one.


This being the case, I see no purpose in calculating the return for each stock for the current year in order to weed out the slow ones. This is more an approach I would adopt if I were a somewhat impatient short term trader. In the world of investing in part ownership of businesses, this kind of asset trading would in my opinion be making my investments be driven by the emotional swings in the market. It is shifting focus from the performance of the business I have bought part ownership of to the random fluctuations in the price of the stock. That is not to say that the price does not sometimes give signals of bad news ahead of announcements, but that is a matter of capital protection rather than maximisation of return.


I am intending to make some changes to my portfolio workbook, but they are aimed at making some of my processes better. I have formed the view that annualising the return stock by stock in the current year would be to shift my focus in the wrong direction.


All that said, I really appreciate you raising this issue and it has been very worthwhile in prompting me to think through whether it adds to what I am doing as an investor.