By
Today we will go over how you can expand on the information that you must keep for the IRS to develop a very easy portfolio tracking system that is good for tracking your IRA's progress as well.
First, there are a number of commercial programs that will do this for you, including Microsoft Money, Quicken, or Fund Manager. I've used Quicken for about 10 years to track my bank accounts and pay bills, and I love the program. (I don't love the company that makes it, though. Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> seems to think that "Customer Service" means erecting as many barriers as possible between their Customers and their Service personnel. But that's another long and frustrating story.)
My purpose here is not to suggest one or another investment tracking software package. I figure that people who are going to use those programs have already heard plenty about them. If you enjoy that kind of software, and it can really give you some great information as well as display gorgeous graphs, by all means check them out. In fact, we have a discussion board on Investing Software where you can see what packages other Fools like best.
But these packages all have a learning curve, and I know darn well that lots of you are just not going to make it up that curve. Even though I have used Quicken weekly for years and years, I've never bothered to input my investments into it because I don't see it being time-effective for my purposes. I've had a spreadsheet that predates Quicken, and that does the trick for me. Even the tech-savvy might find that a pencil works best some times.
So all you guys who have a great investment tracking program already don't need any help. It's "everybody else" that I am writing for today.
One thing The Motley Fool stresses is that you absolutely must track your investment returns. Otherwise, how do you know if you are beating the market? And if you aren't beating the market over an appreciable number of years, you should be making some changes; at the very least you should be switching to an index fund.
I use a minimalist approach to investment tracking because it suits me, and I recommend it to anyone who is not happily involved in a long-term relationship with a portfolio tracking program. This approach is not suitable for high-volume traders, and I don't even begin to know how to account for margin loans or other exotic investment possibilities with it. It's also probably inadequate for dividend reinvestment plans (DRiPs), which require tracking every single reinvested dividend unless you are lucky enough to find a DRiP that will function as an IRA custodian. But it is perfectly adequate for most average investors, and it has a really shallow learning curve.
Yesterday we discussed what kind of records you need to keep, namely your buy and sell trade confirmations, your year-end brokerage account statements, and the Form 1099 that brokers send out summarizing your yearly interest, dividends, and stock sales. If you missed yesterday's column, you might want to check it out before proceeding with this one.
I also confessed that I just toss all my brokerage statements and transaction confirmations in a pile all year and deal with them only at tax time. I started off doing that because I was lazy, but now I think it's a very valid and useful approach. Just realizing that I didn't have to enter everything every month was such a feeling of relief for me that now I enjoy the annual ritual of tracking my investments. And I honestly think I spend much less time doing it this way. I know I save a lot of worry and guilt time.
OK, you've got your trade confirmations and you have your buys matched with your sells. Some of your buy information may be there from prior years. You enter the new information from each confirmation slip as follows, either in a spreadsheet or in columns on a piece of paper. (Sorry, can't show columns here -- the page is too narrow. Turn your head and read the following sideways.)
1999
1) Date purchased
2) Number of shares
3) Ticker
4) Cost basis
5) Date sold
6) Shares sold
7) Net proceeds
8) Dividends received
9) Gain or loss
10) Split factor
I used to include per-share prices and the commissions on my spreadsheet, which I then used to calculate the cost basis and net proceeds instead of entering them from the trade confirmation, but there is no real reason to keep that information. In fact there's a very good reason not to keep it. Whenever I had a stock split, I had to recalculate the cost basis by multiplying the number of shares and dividing the price, which is a pain and completely unnecessary. The IRS couldn't care less. It's nice to see how much you paid in commissions, but other than reinforcing your desire to keep commissions low, it's not necessary to track it.
You should track splits, but only because you may not sell an entire position at one time, and you will need to be able to calculate what percentage of your cost basis you should allocate to the sale. I do that with the split factor column. If a stock splits 2-for-1, the split factor is 2; if it splits 3-for-2, it's 1.5; and so on. If it splits a second or third time, you multiply the existing split factor by the new one. So a stock that splits 2-for-1 and then 3-for-2 would have a split factor of 3 (2 x 1.5). You simply multiply your original number of shares by the split factor to see how many shares your original purchase would be today. That lets you see what percentage of your holding you have actually sold and calculate an accurate cost basis.
Whoops, I'm getting into too much detail. The point is that with the information above, entered once per year, you can use a very easy spreadsheet or a paper ledger to track your investments as long as you keep them relatively simple. To track your portfolio performance, you will need a separate page that lists the starting value and each cash deposit or withdrawal, and the date they occurred. I also keep the year-end balance in there. If you add or subtract cash, you will need a spreadsheet program to get an accurate compound annual growth rate, but we will discuss that next week.
I know you are going to ask, so yes, next week I will put up a copy of my spreadsheet so that you can download it and see what I am talking about.
Fool on and prosper!