My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


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Total Return on Investable Cash

Contributed by mm | January 5, 2004 2:32 PM PST

I'm introducing a new metric "Total Return on Investable Cash " for my personal finance management.

In 2003, I'm primarily focusing on the return on my invested cash in actively managed accounts, namely my brokerage accounts in Datek and AmeriTrade, and my 401(k) account and Roth IRA account in Fidelity. While I can use absolute ARR and relative ARR (against benchmark S&P 500) to measure my performance in stock picking, those measures are not reflective of my holistic capital allocation efficiency.

For example, last year I recorded an annual ARR of 21% for my actively managed accounts. However, as most of the time I am not fully invested, my real return on my total available cash is much lower than that. In that sense, I will need a metric to not only measure the performance of my investment decisions, but also that of my de-investment decisions. In that way, I can relate the readings of the metric to my total net worth appreciation.

In this logic, I'm creating a new metric "Total Return on Investable Cash" (TRIC). The metric is defined as total return in dollars, divided by investable cash in dollars, and annualized. Total return includes (realized and unrealized) capital gains from stock or mutual fund appreciation, dividends, interests and gains from certain financial promotions. Investable cash is defined as the average balance of my saving, brokerage, Roth IRA and 401(k) accounts, minus $5,000 for day-to-day liquidity requirements. For simplicity purposes, investable cash over a period of more than one month is proxied by averaging the month-end balance of each month.

Here is how I fared in this area for the year of 2003: I had a total return of $5,911 in 2003, including $5,405 capital appreciation and dividends, plus $506 in interesting and bank promotions. The average of month-end balance for my investable cash is $63,755 after subtracting $5,000 for liquidity issues. Therefore, my TRIC for the year is $5,911 / $63,755 = 9.27%. I consider this as a fairly good number especially considering the fact that in early/mid 2003 I intentionally accumulated a lot of cash liquidity for the downpayment of my house.

It is important to note two things: First, both the total return and investable cash calculation do not include ESPP and stock option accounts to avoid skewness. ESPP gain is a sure-thing with my mechanical sell-immediately strategy and stock option return should not be measured as on the base of period-start stock option value.

Second, the calculated return is before-tax. Of course an after-tax return will be more meaningful but it will add disproportionate complexity to the definition because it is hard to calculate the exact incremental tax caused by the investments without looking further for the holistic tax picture of my properties.

What's my target for the long-term TRIC? 10% for now. My retirometer model calls for an after-tax return of 8% on my net worth to successfully retire by 40. 10% pre-tax gain is what it takes to get there.

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