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What is inspiring my burst of gratitude today are notes from several readers who wrote to tell me about a new website called GainsKeeper.com. The site launched in January and appears to be the answer to an investor's dream. Besides tracking investments and producing a Schedule D for you, it automatically adjusts your holdings for "corporate actions" like splits, spin-offs, mergers, name changes, etc., and keeps you honest regarding the wash sale rules.
I haven't had a chance to use it a lot -- I have to admit that the set-up process needs some more usability testing, and a few "Next" buttons would be appreciated. But that's the kind of thing any new website will face. However, it did accurately track the splits and name change of JDS Uniphase <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDSU)") else Response.Write("(Nasdaq: JDSU)") end if %>, my toughest test stock.
Right now, you can register and use the site for free, although I gather from their news releases that they may begin charging for the service, or possibly only for a "professional" version of the service, at some time in the future. Also, you should be aware that it can only provide adjustments for corporate actions that took place after January 1, 1999. It's not going to bail you out if you're trying to track down the true costs basis of those AT&T shares you bought in 1981.
I haven't yet decided to abandon my spreadsheet and transfer everything to GainsKeeper, but it is certainly a possibility. I've been grousing for years about the poor record keeping provided by brokers, so when I come across something that appears to be exactly what I've been thinking we need, I'd be pretty dumb not to give up my spreadsheet, no matter how fond I am of it.
But I'm stopping short of an out-and-out recommendation. Besides the awkward set-up process, which I'm sure they will fix, I haven't yet found any way to calculate a Compound Annual Growth Rate (CAGR). I assume it's in there somewhere, but I can't find any mention of it. Also, the site appears to track only investment holdings. I haven't found a way to deal with the cash in a portfolio. OK, so it's not the full and complete answer to my dreams, but it's a big step in the right direction -- a direction mostly ignored by brokers. GainsKeeper hopes to partner with brokers -- now that would be a dream come true. Buys and sells could be automatically entered. All you would have to do is trade. I could throw away those stupid stapled buy and sell confirmation slips!
But CAGR is absolutely the one thing I think people must know about their investments. If you don't know how your account is growing, how can you possibly evaluate your performance? Our most basic Foolish advice is that you should not continue to invest in stocks unless you can beat an index fund over the long-term. How do you know if you are doing that?
The only way I know of is to calculate your annualized returns. I'd have to keep my spreadsheet for that reason alone, if I can't find that function on GainsKeeper. Which brings us back to the spreadsheet we were discussing on Monday. That will give you a CAGR for each stock and your portfolio as a whole. By the way, I've put up a new version, complete with accurate formulas (one more thing to thank the readers for) and some expanded instructions. Yeah, I got suckered into trying to make it actually useful for people, which I am sure I will regret given just how limited its usefulness is. But at least it does CAGRs.
Most portfolio trackers will show your total return for each stock, but I am not aware of any that calculates a CAGR for each stock. Actually, that may be smart. The CAGR for short time periods can be very misleading. Any CAGR that covers a period of less than six months should be disregarded completely. When you are looking at one stock only, even a period of one to two years is more "interesting" than meaningful. CAGR is far more useful for true long-term holdings or for your portfolio as a whole.
Two different formulas for calculating CAGR are used in the spreadsheet. The one for individual stocks uses the total return and the holding period. This one you can even do with pencil and paper -- and a fairly advanced calculator. Here's how:
Find your total return by dividing your net proceeds (or current value) by your cost basis. (Notice, we aren't using the price per share. That way lies madness. If you've done a partial sale of your holding, adjust the cost basis.) Then you take the X root of your total return where X is the inverse of your holding period. Lost you with that one, didn't I? The inverse of your holding period is simply 365.25 (the number of days in a year) divided by the number of days you've held the stock. For example, if you've held a stock for exactly two years, that fraction would be 0.5 (365.25/730). This is where you need the advanced calculator. Fractional roots require a bit more chip power than just taking the square root, but it's the same idea. (The Windows calculator will do this in Scientific View.) Once you have your X root, subtract 1 and convert to a percentage.
When it comes to figuring out the CAGR of your whole portfolio, you can use the same method substituting your starting and ending balance for the cost basis and net proceeds IF you haven't added or subtracted any cash. If you have, then things get complicated, and it's really time for either a calculator that does cash flow analysis or a spreadsheet with the internal rate of return function. That's what I use and it's quite nifty-cool. You just enter your starting balance and all deposits and withdrawals along with the corresponding dates. Then you put in your current balance (as a negative number) and boom, a CAGR is calculated that adjusts for your cash activity.
Does that make you think "Hmm? Beardstown Ladies?" That's right. Somehow their cash deposits got counted as investment returns. It's pretty easy to beat the market if you are allowed to do that. But you're not.
Fool on and prosper!