SMSF | Slack Investor

What’s that smell? … Banks!

With great thanks and acknowledgement to the insightful and talented Randy Glasbergen

KPMG have just reported that banks are starting to lose their shine and the big 4 banks in Australia have reached a “turning point”. Slack Investor would argue that, after a pretty good recovery post the GFC, Australian Banks have been in decline since early 2015. NAB is the last to confess this reporting season … They are all businesses that will find growth difficult.

With its full-year profit of $4.8 billion, down 13.6 per cent, it joined ANZ, Commonwealth and Westpac in announcing a big decline in earnings.
From abc news

The ASX Bank Index since 2000. Except for the GFC 2008/9, the banks have performed well – as well as paying high dividends. Things changed in March 2015 where, despite temporary recoveries, there has been a general decline in share price. From Investing.com

Self Managed Super Funds are a great place to park your super money for the hands-on investor. But, they are not for everyone. You really need to have a real interest in investing and at least $200 000 in your super savings. According to ATO Data, at 31 December 2017, the most commonly held SMSF share investments (by investment size) are below: There are a lot of banks!

Commonwealth Bank
Westpac Banking Corporation
National Australia Bank
Magellan Global Fund
BHP Billiton Limited
Platinum International Fund
ANZ Limited
Telstra Corporation
CSL
Wesfarmers

Not a bad portfolio for the past 10 years … but, the tide for the banks has already turned with low interest rates affecting margins, increased competition from the more nimble digital banks, the Hayne Royal commission “blowback” forcing the banks to separate from their profitable wealth management businesses, and recent dividend cuts announced. A closer look at the top 5 SMSF shares with financial statistics from the excellent marketscreener.com. The 1-yr returns over the past year for each stock are lifted from marketindex.com.au .

SMSF 2017 Top 5 Shares		P/E 2020	Yield %	ROE %	1-yr Ret %
Commonwealth Bank	CBA	15	5.5	13	12.4
Westpac Bank	WBC	14	5.9	11	-3.7
National Bank	NAB	12	6	12	16.7
BHP Billiton	BHP	12	5.3	22	10.9
ANZ	ANZ	12	6	12	-3.9
Average		13	5.7	14	6.5

Slack Investor can understand the lure of juicy bank dividends for SMSF funds. But, if the dividend is coming with a reducing share price due to the bank business shrinking – then this is not a good deal – and perhaps look to higher yield industrial shares or industrial/office REITs for that cherished income rather than banks.

Sing the praises for Return on Equity (ROE) and Earnings per Share (EPS) Growth

This is one of the first financial statistics that I look at when deciding on a company to buy. Return on Equity is a company’s Net Profit ÷ Average Shareholder Equity. If a company had a net worth of $10 million and made a profit of $2 million, its ROE would be 2/10 x 100 = 20%.

High ROE companies generate a lot of cash – this cash they can then use to grow their business. If they also have a good increase in their Earnings Per Share (EPS) – Slack Investor would classify them as “Growth” Companies.

CSL Earnings per Share- and projected EPS for 2022 -2024

Generally, companies with a ROE of >15% get Slack Investor’s attention but some businesses require lot of infrastructure before they can generate profit. For this reason ROE is best used to compare companies in the same industry. For contrast with the 2017 SMSF, let’s have a look at Slack Investor’s Top 5 stocks from the Portfolio page (This is not advice!). Data gathered from marketscreener.com and marketindex.com.au .

Slack Investor Top 5 Shares		P/E 2020	Yield %	ROE %	1-yr Ret %
CSL Ltd	CSL	38	1.2	35	38.3
Altium Ltd	ALU	46	1.6	31	44.9
Cochlear Ltd	COH	41	1.7	38	26
Macquarie Group Ltd	MQG	16	4.4	16	11.5
REA Group Ltd	REA	40	1.3	35	27.9
Average		36	2.0	31	29.7

The average ROE for the Slack Portfolio is much higher than for the 2017 SMSF top 5 (31% vs 14%) . They also all have a projected increasing Earnings per Share (EPS) – and this indicates the Slack preference for growth companies.

However, with growth comes volatility and the Slack Investor top 5 would not suit those who rely on their investments for income. The Slack portfolio would probably suit an investor with a longer term view and a separate income. If you are still working and want to grow your wealth through shares … then the ROE should be one of your guiding lights for company selection.

Slack Performance … Not So Slack

Last post I described a change to the Slack Method for managing Index funds. Index “whole market” funds are just a small part of my share portfolio – about 3%. The bulk of my share market exposure is in individual growth companies.

Slack Investor is a great believer in measurement and is most un-Slack when it comes to record keeping and recording his investment results.

If you can not measure it, you can not improve it
Attributed to Lord Kelvin … his more verbose quote is here

My main cycle of measurement is at the end of the tax year in Australia, June 30. Because the results of one-year performance can be a bit misleading. I am much more focused on results over 5 years as these longer term measures are more meaningful to the investor. The benchmarks I have used have been mainly sourced from the excellent NetActuary site. A shout out to the low cost Vanguard Growth Index Fund. When I tire of investing in individual companies, this (or Vanguard ETF’s) is the type of vehicle that would be a good resting place for funds that require minimal supervision.

The SLACK FUND 5-yr average compound return vs BENCHMARKS. The Median Balanced Fund, Vanguard Growth Fund, ASX 200 Accumulation Index, Residential Property median in both Brisbane and Melbourne, and Cash (Online bank Interest)

A good way of measuring growth is comparing $10000 invested in the Slack Fund in the 9 years since 2009 against benchmarks.

*The SLACK FUND growth of $10000 invested October 2009 vs BENCHMARKS. The* Median Balanced Fund, Vanguard Growth Fund, ASX 200 Accumulation Index, Residential Property median in both Brisbane and Melbourne, and Cash (Online bank Interest) and Consumer Price Index (CPI)

Year by year results are presented in table form below. I will add results at the end of each financial year and put them on The Slack Way page.

YEAR	SLACK FUND	MEDIAN BAL	VGARD GROWTH	ASX200Acc	RES BRIS	RES MELB	CASH	CPI
2010	6.6	9.8	12.3	13.1	8.5	24.3	4.2	3.1
2011	2.5	8.7	9.1	11.7	-3.6	-2.0	4.4	3.7
2012	8.3	0.4	1.3	-6.7	-2.7	-4.8	4.3	1.2
2013	26.5	14.7	18.6	22.8	3.7	3.3	3.2	2.4
2014	23.6	12.7	14.5	17.4	6.8	9.3	2.6	3.0
2015	2.4	9.6	11.8	5.7	3.4	7.8	2.5	1.5
2016	14.2	2.8	4.2	0.6	4.9	8.2	2.2	1.3
2017	19.5	10.4	8.8	14.1	3.0	13.8	1.9	1.9
2018	37.6	9.2	10.0	13.0	1.1	2.3	1.8	2.1

For this site I have only presented my share trading results since 2009. Any cherry-picking of data to avoid the terrible investing years of 2008 and 2009 is coincidental. Out of the ashes of the Global Financial Crisis (Great Recession), 2009 is the year that I started my Self Managed Super Fund (SMSF Slack Fund) and from which I have independently audited results. For the record, prior to 2012, I was not what I regard as a very successful investor. My investments for the 2003-2011 period performed worse than the Median Balanced fund on 6 out of 9 occasions.

What changed? I started to go to a local investment class which made me re-evaluate my investment method (Thanks Robbie Fuller!)

Took a more disciplined approach to investing by documenting everything and having weekly and monthly and yearly chart reviews of my investments
Tried to reduce confirmation bias from my portfolio – i.e. I bought this stock for a good reason … I am smart … the price has gone down … the market must be wrong! – I would score myself 5/10 on this goal!
Started using charts and stop losses extensively.
Started investing mostly in growth companies that have some barriers to entry for competitors (moats) – Companies with manageable debt, with future PE less than 25 -30, and with a return on equity (ROE) of >15%
Before investing in an individual company use both fundamental analysis (Thanks Market Screener) and technical (chart) analysis (Thanks Incredible Charts) before I make a buy order.
Tried to follow the Peter Lynch approach to my portfolio. Selling the bad performers (weeds) and trying to add to my position on stocks that are doing well (flowers).

You won’t improve results by pulling out the flowers and watering the weeds.
Legendary Investor Peter Lynch from quoteswise.com

Investing in growth companies can have its despairing moments and I cannot guarantee that the Slack Fund will continue to outperform the benchmarks … but, the results, so far, are good.

APRA … its even better than OPRAH

Hang on Slack Investor … What are you saying? Oprah, the font of lifestyle guidance … has a rival! How can the Australian regulatory authority APRA match Oprah wisdom that spouts such useful advice as this …

You can either see yourself as a wave in the ocean – or you can see yourself as the ocean – Oprah Winfrey – Source

Wheras Oprah has been an inspiration to millions, Slack Investor has a different, more researched, inspiration … he has fallen in love with an Australian statutory body – APRA is the Australian Prudential Regulation Authority.

Australia’s total superannuation assets rate of return – From APRA report

Oh APRA …. I do love you … You are the Ocean … it’s the indifference that you show me … the complete lack of spin … just information …. Oooohhh! you may have let us down in the distant past (HIH collapse, 2001), but your new muscular stance on differentiating between superannuation products is appealing … it gives me hope for all statutory bodies. One of APRA’s duties is to collect information on the superannuation sector and report. They report the total superannuation assets in Australia grew to $2.7 trillion in the year to June 2018. The Self Managed Super sector has a staggering 27.7% of these funds. Slack Investor is gladly part of this self managed sector and enjoys the flexibility of an SMSF. Last years average rate of return for all super funds was almost 8%.

The chart shows some great annualized Australian super returns for the past 5 -years of 7.9%

The Productivity Commissioner and Slack Investor hero Karen Chester argues that there is a need for the Super system to look after the default member who is likely to remain disengaged.

“what workers need is not “bells and whistles” – which bring with them higher fees – but “low-cost, top performers” with a “balanced investment strategy” Karen Chester From The Guardian

APRA continues to monitor performance of Industry vs Retail Funds and the yearly percentage advantage of having Industry funds(rather than Retail) is shown above.

While we wait for the politicians to act on these matters, get engaged and consolidate your super into one fund – and it should probably be an Industry fund. If Slack Investor can’t motivate you – then perhaps Oprah can … Right On Oprah!

“If you’re sitting around waiting on somebody to save you, to fix you, to even help you, you are wasting your time because only you have the power to take responsibility to move your life forward.” Oprah Winfrey – Source

Financial Year 2018 – Slack Portfolio Review

As Slack Investor is a student of the financial arts and a lover of measurement, the end of the financial year is a great time to review and see how the Slack Investments performed. The Index funds were reviewed last post. Index funds are a great way to start investing in shares – as you are spreading your risk over at least a hundred companies.

The next step, as you become more familiar with investing and can start running a critical eye over individual companies, is to invest in individual stocks.

Over 75% of Slack Investor’s share investments are in individual stocks. See Portfolio

Most of my holdings are in growth stocks. These stocks usually have a high Return on Equity (ROE>15%) – with a track record of increasing dividends. By their nature, they have a relatively high PE ratio and are usually punished in the markets during reporting season if there is any bad news affecting future earnings. This I accept.

Slack Investor Stinkers – FY 2018

Each year I expect a few stinkers and dont beat myself up about them when they occur. If they breach the monthly stop loss – I usually sell at the start of the next month.

-24%

A special mention for IPH. Although some investors have done well with this stock. this company has a prawn heads in the bin on a hot day type of stink for me. Slack Investor likes the idea of the company -and it seems to be making a bit of a recovery since I sold it! However, I have had difficulty trading it successfully as it would go into long periods of declining price immediately after my buys. I should have learned my lesson years ago with Slater and Gordon – Never trust Lawyers!

-22%

HSO has got caught up with a tightening on government health spending and a decline in private health care admissions.

-21%
RHC is also in the healthcare sector and has the same challenges as HSO. But, it is a well managed company and Slack Investor will look for an opportunity to get back in this stock.

Slack Investor Gold Nuggets – FY 2018

The wonderful thing about owning growth companies is that sometimes they surprise on the upside and grow faster than expected. Altium is the “Welcome Stranger” of gold nuggets.

+166% ALU makes software for the designing of integrated circuit boards that are used widely in a range of technology products. Some analysts fear that the stock is overpriced. Its PE ratio is currently an eye-watering 74 – but this is rapidly reducing with projected earnings over the next few years. I am still holding as we go into the reporting season – the optimist in me thinks that there may be more good news on future earnings. There are even rumours of a takeover by larger company. But if not, my end of month stop loss is $19.61.

+71% A2M’s brand relies on a patented process that makes milk with only the A2 protein. A2M has been the subject of a previous post, and it is true that I’m yet to be convinced of the health benefits attributed to A2 Milk – But their marketing is very good and the trend is more powerful than logic in my book! Slack Investor was stop-lossed out of this stock earlier this year, but has bought in again -and hope for good news this reporting season.

Honourable mentions for Slack Investor portfolio stocks that increased more than 30% in this remarkable financial year. These nuggets include APX, CSL, MQG, NCK (no longer held), PMC, REA, SEK and WOR.

Slack Investor SMSF performance – FY 2018

I have written extensively on calculating Portfolio returns. I run a few separate portfolios but only quote the SMSF annual returns as this portfolio is externally audited. All percentage earnings quoted include brokerage and portfolio costs. Both raw and franked dividends are included as income. So essentially, the percentage returns include costs but are before tax. This raw figure can then be compared with other investment returns.

In what can only be described as a high-water mark for Slack Investor’s SMSF portfolio investing prowess. (and the luck of holding ALU inside it), Portfolio return FY18 was 37.6%.

One-year high returns are welcome but Slack Investor puts more weight on multi-year performance. The past 5-yr progress of the Slack Portfolio is 23.6%, 2.6%(whoops!), 14.2%, 19.5%, and 37.6%. This gives a compounding annual 5-yr return for the Slack Investor SMSF portfolio of 18.9%. The benchmark ASX 200 Accumulation Index (Including dividends) 1-yr and 5-yr compounding annual returns are 12.7% and 9.9% , respectively.

“Good luck is a residue of preparation.”

– Jack Youngblood – Hall of Fame American Footballer

Slack Investor readily acknowledges the luck factor in the stock selection process and realises that this FY18 as an extraordinary year for the portfolio (I expect more moderate returns!). I have found that a disciplined stop loss process, a bit of effort and research on stock selection, and following of trends on share charts (technical analysis) can yield very good results.

Over the next year I will post on how to start investing and the specific techniques that Slack Investor uses – It is not difficult … Empower Yourself!

The Royal Commission into Finance … Yes Please!

David Rowe cartoon From the Australian Financial Review – May be subject to Copyright

The incomparable David Rowe has a daily habit of drawing great cartoons. This image describes the current situation with the excrement covered big 4 Australian bank pigs dragging the Australian Treasurer and the Minister for Revenue and Financial Services along for the ride in front of the Royal Commission.

Lets start again with the astounding ASIC revelation

ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position.

Lets get this straight … I rock up to to a financial planner and I only have a 1 in 4 chance to get some advice in my best interests …. and, I have a one in ten chance of ending up in a significantly worse situation … What is going on !!!! – these are the people who many depend upon for sound financial advice.

The sad case of Sam Henderson

Sam Henderson outside the Royal Commission from news.com.au

Slack Investor writes about Sam only because he is still gobsmacked with the evidence presented to the Royal Commission on 24/04/18.

A bit of background … Sam Henderson is the very public and enthusiastic face of Henderson Maxwell, a financial advice and accounting firm. Sam has been everywhere in the Australian financial media for the past few years with his own weekly TV show and newspaper columns. Slack Investor admits to being a great fan of Sam’s podcasts Sky News “Your Money Your Call” presented weekly on Thursdays. In these podcasts Sam, and others, dispense generally good advice about retirement issues and superannuation.

I have found their program to be extremely informative. They have talked a lot about Self Managed Super Funds (SMSF’s), retirement strategies and taxation – Advice that Slack Investor has found very helpful.

However, Sam has fallen foul of the Royal Commission. Henderson Maxwell charged $4950 up front to give advice to a client that would have been to her detriment – to the value of at least $500 000. It appears that Sam’s firm has acted in their own self interest rather than the clients. Specifically, Mr Henderson urged his client to establish a SMSF and remove her super investments from a generous public sector deferred benefit fund to invest in Henderson Maxwell products, which would have earned him ongoing fees.

The fees proposed by Sam Henderson’s advice would have annually amounted to $19,000 while the client’s existing strategy was costing her $2768.

Although, through this public shaming, Sam has carried a lot of the heat for the widespread malpractice by the banks and financial planners. This case represents the huge problem with the financial industry in Australia and the reason why Slack Investor has educated himself in the dark art of finance rather than rely on a financial advisor to dictate strategy for him.

One of the most galling things about this case is that Henderson Maxwell is considered to be one of the leading firms for giving financial advice. They are the winner of the 2016 Australian Association of Financial Advisers (AFA) award for practice of the year. The AFA advertise their advisers as “Trusted, Knowledgeable, Reputable, Respected”

Slack Investor admits to being a flawed human – but he would hope that he would act ethically even as the financial system drapes its lucrative reward tentacles tantalizingly in front of him. In the case before the Commission, Sam Henderson responded to financial incentive.

What is wrong with the Financial Advice Industry?

Charlie Munger -Source

“Show me the incentives and I will show you the outcome” –

Charlie is vice- Chairman of Berkshire Hathaway and dispenser of financial common sense – another Slack Investor Official Hero

This sums things up. At the moment most financial advisors are given incentives to sell their own products – there is no incentive to represent the best interests of their clients. The regulator ASIC has done a review of the quality of financial advice that had been provided to SMSF’s, and found that

90% of cases had failed to be in clients’ best interests.

It is hoped that the Royal Commission will accelerate change. The Financial Review reported that four years ago the head of the Financial Planning Association (FPA) called on financial planners to unite and push for the separation of product from advice. In the meantime, the vertically integrated financial planning money machine with its fees and trailing commissions has kept on rolling on …

The Hayne Train should address these issues before finally pulling up to the station – While we are waiting, if you really need a financial planner, only use a truly independent advisor registered with IFAAA – No affiliations with product, no commissions and no asset fees . There will be an upfront fee for the advisor’s service – but this fee should be small in comparison to the ongoing costs associated with the lifetime tenure of an affiliated advisor.

Chance would be a fine thing

One of the great things about England is the turn of phrase that the locals enjoy. “Chance would be a fine thing” is a good example of language that is perplexing to the new arrivals. It is the sort of saying that sometimes crops up in the UK that has a meaning that is not entirely obvious.

In context, someone in England would utter this phrase in response to a comment from another that sets up a desirable scenario – but the retort “Chance would be a fine thing” is said to indicate that it is not likely to happen! Further context can be found in the great tribute by David Mitchell to insecure managers in the short but very fine Peep Show “Chance” sketch at this link. Youtube Autoplay will reward the brave with another great character from the show -“Alan Johnson”, the crude and aggressive management guru in the following Youtube clip – But Language Warning with Alan – I Digress! (… but still giggling!)

I like the “chance” phrase, it reminds me of the enormous part that luck plays in the building of a share portfolio – but it is the very opposite of how I think when I buy a stock! I do not buy stocks often and a buy is usually at the end of some good research where I have convinced myself that the stock is growing and is just about to take off when the rest of the market catches up to my brilliant thinking. Bitter experience and keeping good records over 25 years has shown my abilities in picking winners at around the 55 -60 % mark.

At first glance this looks a pretty poor record of stock judgement – However, by keeping my losses relatively small (through monthly stop losses), owning a diverse range of companies (see Portfolio Page), and letting my rising shares rise, and luck, the Slack Investor has done alright – Five year compounded average growth rate (CAGR) for my audited SMSF portfolio of 16.9% p.a..

The luck of stock selection has always been acknowledged by Slack Investor, but it was brought home to me when my son asked, in December 2017, for advice on where to put $5000 in the share market. You would think that this would be an easy thing for Slack Investor who has spent almost 30 years studying the vagaries of the market. 15 months ago I went into a lather and researched very hard and came up with two growth stocks that I thought were not overpriced and had reasonable growth prospects – but I still had a bit of trepidation as, he is my son, and this was his hard earned savings from a part time job -and, I wanted him to continue with the allusion that his Dad knew what he was talking about!

With the usual combination of research and luck, the two stocks that I presented him with were stocks that I already owned – Fisher and Paykel Healthcare (FPH) and Altium (ALU). I gave him the choice after a brief overview of each company (… spread the risk … give him ownership!). The former are world leaders in surgical instrumentation and pumps. and Altium has something to do with printed circuit board design and the “internet of things”. With the wisdom of youth, he picked Altium to put his savings into. I am relieved to say that both stocks have done extremely well in the past 15 months but the weekly charts tell a story – with my son’s choice, ALU, the clear winner (+177%).

Fisher and Paykel Healthcare (FPH) Weekly Chart – From Incredible Charts

Altium (ALU) Weekly Chart – From Incredible Charts

Do you think Slack Investor could come up with another Altium as a choice for share investment the next time my son asks me for advice?

Chance would be a fine thing!

Do not be afraid of failure

Based upon fear of what he might discover, Slack Investor keeps most personal introspection to a minimum. However, for a number of reasons, I am particularly fond of reviewing investment performance. … and always looking to tie in a quote from a great scientist and Time Magazine’s 1999 Person of the century – Albert Einstein.

Image from laserfiche.com, quote from brainyquotes.com

Anyone who has never made a mistake has never tried anything new – Albert Einstein (1879-1955)

Slack Investor has made plenty of mistakes and regularly racks up the failures. The 2017 Financial Year, (1 July 2016 – 30 June 2017) annual review of his portfolio has revealed a few “shockers” in the Slack Investor Self Managed Super Fund (SMSF ) portfolio – which I not so proudly list (with their percentage losses) as my financial year investment “fails”

Sirtex (SRX) -34%
TPG Telecom (TPM) -23%
McMillan Shakespeare (MMS) -16%
G8 Education (GEM) -15%
APN Outdoor (APO) -14%
Amaysim (AYS) -11%

These companies have usually dropped in price during reporting season where a bit of bad news, or a failure to reach projected profit forecasts, triggered dramatic price falls. In all cases, these stocks were eventually sold because they breached the end of month stop losses that I had set.

Slack Investor just accepts these setbacks as part of the investment process. The type of companies that I invest in are usually

Growth companies
Have an above average “return on equity” ROE
Have an above average “price to earnings” P/E ratio – Where P/E =Current price/Historical earnings.

The reason that Slack Investor is interested in these stocks is that they usually have higher projected earnings in the years ahead and should perform better than the general market. When I am looking at a stock, the forecast P/E ratios are given much more importance than the actual P/E ratios. However, it is the nature of these stocks to be particularly sensitive to any change in the forecast earnings. If profit forecasts are not met during a reporting season (sometimes referred to as the “confession season”), then there is a mad rush for the exits and the price plummets. Slack Investor is not a day trader and prefers not to watch his stocks continuously. As a result, he is never able to pick the precise right time to bail out.

I am sure there is a cost to this monthly decision making technique – but it is a price a pay gladly. The “peace of mind” in knowing that I only have to make stock decisions once a month – and that I can ignore the daily fluctuations of share prices is priceless to me.

The upside of dealing with these type of companies is that they have excellent growth potential. Thankfully, there was some good news in the portfolio this last financial year due to some heavy lifting from the following stocks.

Corporate Travel (CTD) +66%
from thinklikeatrader.co.uk
Challenger (CGF) +57%
Altium (ALU) +37%
Macquarie Group(MQG) +36%
Commonwealth Serum Laboratory (CSL) +25%
Nick Scali (NCK) +22%

So far, the Slack Investor approach has been very fruitful. I usually own about 20 different stocks and this diversity allows my portfolio to have some individual failures and still do well.

The point of this post is that you can fail in the stock market … but also succeed. I certainly do not dwell on these failures – they are just part of investing.

For the 2017 financial year my SMSF portfolio achieved an overall return (IRR) of 19.5%.

Measurement … The Sweet Science Part 3

Paul Keating, the father of dividend imputation (franking credits) in 1987 – when he was the Treasurer for the Australian Government. He was Prime Minister 1991-96 and is shown here ready to nail to the wall any “24 carat pissants” and “mangy maggots” that cross his path. Source

Previous posts One and Two in this series show a few simple ways to calculate your portfolio performance. Slack Investor has a complicated set of portfolios with inflows and outflows during the year and, for an accurate performance figure, it is necessary to account for the time that your money is available for investment. For example, an additional $10000 invested at the start of the year should add more value to your portfolio compared to an addition in the last week of the year.

I usually calculate returns before taxes, this is sometimes referred to as “gross of tax”. An important reason to do these calculations is to compare your investments with other investments, such as a managed fund, super fund, ETF or another benchmark. With very few exceptions, performance figures are always reported pre-tax. In Australia, we are lucky enough to have our dividends mostly “franked” or tax paid at the rate of 30%. Thanks Paul Keating … you are a legend!

So I include these franking credits in my return calculations as they represent tax already paid on my Australian Dividends.

The Internal Rate of Return (IRR) and Time-Weighted Return (TWR) are two different ways of calculating portfolio performance. The IRR measures the actual return achieved by an investor’s money in a portfolio. There are also good arguments for using the TWR, Both IRR and TWR take into account the time value of money … The arguments for each are presented here –

Slack Investor likes to do things accurately … but easily! The TWR requires a portfolio valuation after every inflow/outflow and this adds an extra step to the calculation. With a spreadsheet, the IRR calculation is a simpler process. So Internal rate of Return (IRR) is what I use.

3. Portfolio with inflows and outflows – Internal Rate of Return (IRR)

The IRR is also known as the “money weighted rate of return” and the calculation is complex as it involves trial and error mathematics – for the enthusiasts further details can be found here.

The good news is that with an Excel spreadsheet, all this is taken care of by the XIRR function and you only have to enter the start value of your portfolio, dates of inflow/outflows and finish value. I have included the rather complex set of inflows and outflows based upon my SMSF portfolio and hope that your portfolio is simpler. Just use the lines that you need, but it is important that you have an initial date and balance, and a finish date and balance – (scroll down to the bottom of the spreadsheet). Inflows are entered as positive numbers and outflows as negative.

To download the Excel spreadsheet that that performs these calculations go to the Resources Page.

Of course, if this is too difficult, you can always get a bit of software to do your portfolio management and return calculations. Slack Investor likes to keep the costs of investing on the down low and Sharesight in Australia is an excellent choice for the starting investor. They offer free monitoring of investments, capital gains and performance reports if you have 10 or less investments to track. Slack Investor monitors his shares with the retired but excellent (and free) “Sunset” international version of Microsoft Money Australian Version, UK Version, US Version linked into share prices with MSMoneyQuotes. The latter is not freeware but it is $10 US well spent.

In the USA, Personal Capital is recommended.