Investments easy approach

Associated directory: 07-investments-easy-approach

Let's start easy

Tracking investments could be as easy/simple or as hard/complex as you want it to be. But in the spirit of "eventual consistency" let's start simple and add more details later.

At this point, exact nature of your investment is not that important. It could be a savings account, brokerage account with some shares in it, your pension, etc. We are going to assume a couple of basic things:

1. Your investment is represented by a separate account (presumably under assets)

2. You (periodically?) invest/pay more money into your investment. At the very least there is one initial payment.

3. Value of your investment changes over time and you record this in your journal. You might receive period valuation document or emails from the financial institution where you keep your savings. Or you might go online and check the value of your investment. Either way, you record the numbers in your journal, and if my experience is any indication, you probably do not have a way to automatically import them. I will assume that you enter manual valuation transactions into your yearly journals

4. Completely optionally, you might withdraw money from your investment. I am mentioning this purely to say that this should not influence calculations I am about to describe.

This way you record and track cash value of your investment, without bothering to record exact nature or structure of it (which shares, how many, ...).

Let's add a pension account to our setup, with periodic contributions going out of current account, like this:

$ hledger -f all.journal print assets:pension 'not:acct:(virtual|equity)'

2014-05-01 (BP) AVIVA
    assets:Lloyds:current           £-100 = £600.00
    assets:pension:aviva

2015-05-01 (BP) AVIVA
    assets:Lloyds:current           £-100 = £650.00
    assets:pension:aviva

2016-05-01 (BP) AVIVA
    assets:Lloyds:current           £-100 = £100.00
    assets:pension:aviva

2017-05-01 (BP) AVIVA
    assets:Lloyds:current           £-100 = £986.93
    assets:pension:aviva

Recording valuations

Recording valuations could be a conundrum. After all, value of investment could go either up or down -- what would be suitable account to balance this against? Should it be income or expense account?

My suggestion is to record valuations versus special "unrealized profit and loss" account, which sits outside of your income and expense hierarchy.

Accountant will say that it should be part of your equity, but I found it easier when it does not mix with all the opening/closing balance transactions that occur in equity. For my examples, I will be using virtual:unrealized pnl as the account that balances your valuation transactions, like this:

$ hledger -f all.journal print "virtual:unrealized pnl"

2014-12-31 pension valuation
    assets:pension:aviva                   = £102.34
    virtual:unrealized pnl

2015-12-31 pension valuation
    assets:pension:aviva                   = £204.41
    virtual:unrealized pnl

2016-12-31 pension valuation
    assets:pension:aviva                   = £308.27
    virtual:unrealized pnl

2017-06-30 pension valuation
    assets:pension:aviva                   = £411.03
    virtual:unrealized pnl

Now, if you look at the register of your pension account, you can see that valuations capture the increate in value of your pension:

$ hledger -f all.journal register -w 80 assets:pension 'not:desc:(opening|closing)'

2014-05-01 AVIVA                assets:pension:aviva       £100.00       £100.00
2014-12-31 pension valuation    assets:pension:aviva         £2.34       £102.34
2015-05-01 AVIVA                assets:pension:aviva       £100.00       £202.34
2015-12-31 pension valuation    assets:pension:aviva         £2.07       £204.41
2016-05-01 AVIVA                assets:pension:aviva       £100.00       £304.41
2016-12-31 pension valuation    assets:pension:aviva         £3.86       £308.27
2017-05-01 AVIVA                assets:pension:aviva       £100.00       £408.27
2017-06-30 pension valuation    assets:pension:aviva         £2.76       £411.03

Computing return on investment

Hledger includes a "return on investment" command accessible as hledger roi. You need to point it to the account that tracks your investments and account that balances your valuation transactions, and it will calculate for you two numbers: internal (or money-weighted) rate of return and time-weighted rate of return.

What are they?

It is quite possible that value of your investments (and therefore rate of return) changes on a daily basis. However, this is really hard to think about (and tedious to work with), so for simplicity we could instead assume that your investment could be approximated with one that grows at a constant rate R.

We need to choose R in such a way that all your cash contributions to your investment, grown at this rate R for the respective periods during which they were invested, add up to the current value of this portfolio.

This rate is called money-weighted or dollar-weighter rate of return or internal rate of return -- IRR for short.

Time weighted returns (TWR) on the other hand, ignores the effect of cash inflows/outflows, but recognizes that different periods of time have different rates of return and attempts to tell you what is the performance of your investment portfolio over time that you held it. This is also commonly called "return on the first dollar invested".

Good description of differences between IRR and TWR can be found in this article, and in Investopedia (check references below).

We can now run hledger roi to find out both rates of return for our toy pension example:

$ hledger roi -f all.journal --investment 'acct:assets:pension not:acct:equity' --pnl 'acct:virtual:unrealized not:acct:equity'

+---++------------+------------++---------------+----------+-------------+--------++-------++------------+----------+
|   ||      Begin |        End || Value (begin) | Cashflow | Value (end) |    PnL ||   IRR || TWR/period | TWR/year |
+===++============+============++===============+==========+=============+========++=======++============+==========+
| 1 || 2014-05-01 | 2017-06-30 ||             0 |  £400.00 |     £411.03 | £11.03 || 1.63% ||      5.41% |    1.68% |
+---++------------+------------++---------------+----------+-------------+--------++-------++------------+----------+

Choosing a period

I found it most helpful to have rate of return reported for the whole period of investment and (if you invest for sufficiently long period) also have yearly numbers to be able to see whether you had "good year" or "bad year".

Luckily, simply adding -Y to your hledger roi gives you yearly breakdown, and we can see that 2014 was the best year so far:

$ hledger roi -f all.journal --investment 'acct:assets:pension not:acct:equity' --pnl 'acct:virtual:unrealized not:acct:equity' -Y

+-------++------------+------------++---------------+----------+-------------+--------++-------++------------+----------+
|       ||      Begin |        End || Value (begin) | Cashflow | Value (end) |    PnL ||   IRR || TWR/period | TWR/year |
+=======++============+============++===============+==========+=============+========++=======++============+==========+
|     1 || 2014-01-01 | 2014-12-31 ||             0 |  £100.00 |     £102.34 |  £2.34 || 3.51% ||      2.34% |    2.34% |
|     2 || 2015-01-01 | 2015-12-31 ||       £102.34 |  £100.00 |     £204.41 |  £2.07 || 1.22% ||      1.02% |    1.02% |
|     3 || 2016-01-01 | 2016-12-31 ||       £204.41 |  £100.00 |     £308.27 |  £3.86 || 1.42% ||      1.27% |    1.27% |
|     4 || 2017-01-01 | 2017-12-31 ||       £308.27 |  £100.00 |     £411.03 |  £2.76 || 0.74% ||      0.68% |    0.68% |
+-------++------------+------------++---------------+----------+-------------+--------++-------++------------+----------+
| Total || 2014-01-01 | 2017-12-31 ||             0 |  £400.00 |     £411.03 | £11.03 || 1.26% ||      5.41% |    1.32% |
+-------++------------+------------++---------------+----------+-------------+--------++-------++------------+----------+

Let automate this

Assuming that you record your valuations manually, you will only need to recompute investment report when your top-level yearly report files change (but not necessary when files included from them change). This could be encoded in export.hs, with actual report generation delegated into a separate script.

I refer you to 07-investments-easy-approach or diffs/06-to-07.diff, where I've added a couple of valuation transactions and a script to compute investment report.

You can see example report here

References

• TWR computations used here are described in a lot of detail on http://monevator.com/how-to-unitize-your-portfolio/

• Good set of articles explaining the concepts could be found on Investopedia: IRR, TWR, value of money, disconting, etc (look at the "Related terms" at the bottom of these pages as well)

Next step

Lets talk about mortgages.