complex gain/loss calculations. Please help

[teojh]

I like to keep records of monthly percentage gains and losses. Its for the future and for establishing a track record. However i utterly cannot make it with these accounting calculations.

Now my dad wants to add X amt into my capital. Let's say its not the end of the month, half way in it. if i had 5k and gained 2k. Then my father add 10k. I gained 6k from there. How is the percentage gain for that month calculated? Are they just combined? Please show me an example.

Now, another example. my fund and my father's portion would be 1:1 or maybe 1:2. Then he wants to take out some profits. OMG i dunno how to calculate anymore. The only way I can think of is take out any amount for both parts proportionately.

Someone good in math or accounting please help here?:smart:
Thanks

 

[Rhody Trader]

When dealing with situations where money is coming in and going out, I generally go with mutual fund style accounting. By that I mean I establish a baseline number of shares with a starting value of some amount. For example, if I have a 10k initial balance I might call that 1000 shares at a 10 starting value. From there, as the value of the portfolio rises and falls, the share price rises and falls. Then, when you need to add money or take it out, you just take the share price at the time and figure out how many shares it is coming in or going.

If you follow a system like this you can use share price as your performance measure.

 

[teojh]

I see. That's very practical and effective.
So for instance the number was 100. My dad got in with 10 units when it was 100. So at the end of the month. I'm up 50% and now the value is 150. I just have to remove that 10 units so actually the fund was up 40% at 140. The 10 belongs to my dad.
Hope my math is right.

 

[Rhody Trader]

Not quite.

If the share value is up to 150 at the end of the month and you take out 10 shares, the share value doesn't change. It stays at 150. There are just fewer shares and thus a lower total value. If you have 100 shares at 100 to start, that's 10,000. If you gain 50% the total goes up to 15,000 and shares are worth 150 as you've indicated. At this point, if you take 10 shares out, that's 1500 in value. It leaves you with 90 shares at 150 for a total value of 13,500, which is the same as 15,000 - 1500.

 

[teojh]

hmm.. ok...
i really suck at math. I will try to figure out with some realistic examples to see if i can understand. if i still need your help is it ok if i pm u so as not to spam the board?
thanks!

 

[Rhody Trader]

It wouldn't be spamming the board to continue the discussion here as needed. Quite the opposite, actually. Others could get something out of it as well.

 

[teojh]

ok. assume i have 9750 (making it a tough number to try).
So i choose to break it into 9750 shares worth $1 each.
someone banks in $10000. So now i sort of reset it to 19750 shares each worth $1.
total gains for a month is 32%
19750 shares now worth $26070. each share worth $1.32
I withdraw 800 shares. now left with 18950 shares worth $25004.

seems easy. now if let's say someone banks in extra money halfway through the month. I was at first up 32%, 19750 shares worth $26070. someone banks in 5k. so its now 24750 shares worth $31070. From this total amount i gain another 15% til the end of the month.
So how do i calculate my gains now?
15% gain means 24750 shares are now worth $35730.50
So my share was 9750 shares worth $1 at first. now 1 share is worth 1.44.
So in fact my monthly gain was 44%.

rhody is that right? are there any more scenarios for me to think about?

 

[Hotch]

Nope

When someone buys the 5k of shares, he doesnt buy at $1 (unless you're really generous), he buys at $1.32 (the current price).

So you end up with 23537.88 shares at $1.32.

Your worth at the end is $35730.5, in 23537.88 shares, making you 51.8% up.

Hope that's right, haven't done this before and just woken up, think so though...

 

[teojh]

oh yea. logically u shld be correct

 

[Rhody Trader]

Hotch has got the figures right.

The beauty of this approach is that figuring out your performance at any stage is easy. You just look to the change in share price. You don't have to think about the change in the portfolio value with all the deposits and withdrawls.

 

[teojh]

So every time theres a cash infusion, i increase the number of shares?
Or do i keep the same number of shares, calculate the new value and proportionate accordingly?

 

[Rhody Trader]

Cash in = more shares
Cash out = less shares

 

[Hotch]

Hotch has got the figures right.

But of course :smart:

 

[timetotrade]

Hi Teojh

Sounds like you're essentially setting up a "mini investment club" with your dad. As you can imagine, investment clubs can have a nightmare trying to manage diffent monthly subscriptions and withdrawals from many different members, so they use the unit valuation system that Hotch and Rhody Trader have described.

You might find the following article helpful:
Unit Valuation System

and here is a presentation slides from last year's Investment Club Conference, with some more examples
http://www.timetotrade.eu/videos/04_Is_Equal_Share_Really_Fair.pdf

If you're still unsure of how to do the calculations, then you can set up a free club account with timetotrade and it will work out the valuations for you (make life a bit easier!).

Hope that helps
timetotrade