Finally a clear method for calculating Portfolio Performance for an AIMing Account!
At my introduction to AIMing via Money Spinner using the sequential buying and selling of equity and using a Reserve in Cash in a bank account I have been at odds with the Yield On Investment as a percentage for AIM Portfolio's.
In Engineering and in Business a yield % can be calculated on every part of a process and defining Efficiency was an ever re-occurring problem: “Efficiency based on what? “
Thermodynamics Professor at the University of BC in Vancouver, Canada, deserves the credit for defining yield as a ratio as follows for us:
-------->(What You Get)/(What You Pay For)<---------
Of course, WYG/WYPF can easily bet translated to OUTPUT/INPUT but that is misleading for processes for which one does not have to pay or have to do work for: All inputs do not have the same Input Quality
In AIMing Return On Investment------ROI------as a percentage is not sufficiently defining to mean anything at all, when dealing with a Portfolio in which Equity and Reserve are not seen as a single entity, input entity, unless one specifically considers the Reserve as a separate investment that makes it unavailable for other purposes. . .Money in a savings account, although technically one can consider it as an an investment, most people however do not.
Tom Veale has provided on this Forum years ago an interesting method to define a Return on capital at risk-------ROCAR.
The definition of ROCAR did not completely satisfy me. . . .it only considered the amounts paid for equity: 1) All cost factors that are incurred to set up an Investment Portfolio are not included and 2) the fact that in an AIM Portfolio one can, and people do, add money to the Reserve or they withdraw money from the Reserve(often not even changing the bank account they used for the portfolio reserve).
Essentially a simple ROI yield is never a proper yield because both the equity and the cash is fluctuating in time.
Our VORTEX AIMing program has been modified to account for the following two ways of Yield Percentage Repersentation:
1 Return on Time Averaged Capital----------> ROTAC
2 Return on Time Averaged Investment----------> ROTAI
ROTAC is very similar to the simple ROI except that when one “stacks” his portfolio with money at various different times, or withdraws money, for example as retirement income, the input in capital reduces over time and the real yield on capital becomes quite different, and the ROI no longer is an effective indicator of how well your Portfolio has performed.
ROTAI considers as inputs only the real cost factors for “Running and Maintaining” an Investment Portfolio. . . any cost factor the investor considers a investment factor. . . .any money you “paid” for purchasing equity en any money you “paid” for maintaining the investment are considered time depended inputs. . .these investments are risk. The Capital in the Reserve is not at risk. . .it is part of all the assets you own.
When the Reserve is used as a special investment that you specifically not considers as money in the bank then inputs like that are time related investments. . . .and are no longer considered as a reserve. Admittedly this a matter of choice! You are the Manager.
Incedentially, both our ROTAC and ROTAI use the same calculation routine to calculate the time-averaged-input. The method is formally referred to as the Internal Rate of Retutn(IRR).
In Vortex AIM the main Interface Screen of the Beta version shows the ROTAC and the ROTAI options for the individual Funds as well as the Portfolio in which multiple fund can be grouped. Each fund is separately shown together with the Portfolio Results. By clicking on ROTAC-button the relevant information invested capital is shown, for each fund as well as the Portfolio as a whole. Clicking on the ROTAI-button shows the relevant information for the equity costs, in a similar way.
Typically, for a portfolio in which “things” change over time the ROTAI is much larger than the ROTAC because the yields-base is usually much smaller.
AI
