When you measure returns on your investments, do you take into account the effect of inflation on your returns? If you don’t, then this is something you should start routinely doing.
In this blog post, I will show you why it is so important to know what your real return is, and I will also give you an easy-to-use portfolio tracker that you can use to track the real returns of all your investments.
Nominal vs Real Returns
You may think you are growing your wealth if your portfolio grows by 5% per annum, in nominal terms. In times of high inflation, you could be losing your buying power and you wouldn’t even realize it if you are not tracking the impact of inflation on your returns.
The annual inflation rate in the Eurozone was 10% in November 2022. Using this information, we can calculate the real of return for an investor whose portfolio grew 5%, in nominal terms, over the same period using the below formula.
The real return works out to be -4.5% ((1.05)/(1.1)-1), even though the investor may have thought they were doing well.
You will never have to worry about making the same mistake as this investor if you use my Google Sheets portfolio tracker below.
Download my Google Sheets portfolio tracker for free
Google Sheets Portfolio Tracker Instructions
Manual Input Fields: All fields that are highlighted in blue require manual input. These are details such as the transaction date, ticker symbol of stock, number of shares bought and the average cost price.
Inflation Data: The data source that I have used in my template is the overall Eurozone Harmonized Index of Consumer Prices (HICP) data. Make sure to update the data in Column C to your specific region’s monthly data. This data will need to be continuously rolled forward as time passes to add in additional months data.
The difficulty of calculating the real return of a portfolio
There are two main difficulties in putting together a universal portfolio tracker that helps investors work out their real returns.
Firstly you cannot just apply one single inflation rate to your entire portfolio unless you bought all stocks on the exact same day. In reality, when people build investment portfolios, they often add more and more to their investment pot every week or month.
Secondly, the inflation we feel is different depending on where in the world we are from. Investors in the United States will have to contend with differing levels of inflation to those in Ireland.
For these reasons, the portfolio tracker that I have created is well worth implementing for your own investments as it overcomes both of these problems.
Additional features of the portfolio tracker
The google sheets portfolio tracker is set up to also track all the below critical bits of information:
- Beta of the company
- Market Cap
- PE Ratio of each stock
- Daily % change
- Gain/Loss in base currency
- Gain/Loss in local currency
- % Return in base currency
- % Return in local currency
- Foreign exchange gain or loss
- Allocation rate of each stock in the portfolio
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.