Subscribe to RSS feed Current Cost vs Total Cost vs Max Deployed Capital

By evankoh posted on 4 Aug 2017  -  23,094 views


Recently, I have changed how the "P&L + Dividends + Closed" percentage was computed, from being based on "Current Cost" to "Total Cost" (read more about it in this article). However, several users have reached out and suggested that to base the "P&L + Dividends + Closed" percentage on "Total Cost" would penalize users who trade more frequently.

Upon further discussions, we came up with "Max Deployed Capital" as one possible candidate to base "P&L + Dividends + Closed" percentage upon. However, not everyone agrees that it is the best approach.

But perhaps, there is no single best approach. Rather, it's just finding the one that best suits you. Hence, you can now decide for yourself what your "P&L + Dividends + Closed" percentage should be based on via the settings here, with the default being set to "Max Deployed Capital".

To recap, here are the definitions and explanations of each.

Current Cost
Definition: "Sum of [buy price x number of shares] for each stock currently in portfolio".
Explanation: This is simply the capital currently deployed. StocksCafe have been basing "P&L + Dividends + Closed" percentage on this for a long while and maybe you are used to it. The weakness of this approach can be seen here.

Total Cost
Definition: Current Cost + "Sum of [buy price x number of shares] for each closed position".
Explanation: This is the total capital ever deployed. There will be double counting if you buy and sell regularly and reinvest the money to buy other stocks. This is why several users believe this depressed the "P&L + Dividends + Closed" percentage.

Max Deployed Capital
Definition: The maximum current cost at any time point.
Explanation: This prevents double counting if user reinvests the money. However, if there is a huge capital outflow (and not coming back), then "P&L + Dividends + Closed" percentage will be depressed. Example: If I started with $100,000 worth of stocks but because I needed cash (for whatever reasons), I closed many positions and diverted the money elsewhere leaving only $10,000 worth of stocks for the next 5 years, then it might not be reasonable to compute the returns based on $100,000 (max deployed capital).

Conclusion
Each approach has its pros and cons and may suit different users depending on their situation. Hence, I leave it to you to decide what fits you best.

In any case, note that the most comparable and annualized way to compute returns is Time-Weighted and Xirr. They are shown in various places throughout StocksCafe.

Happy investing!

p.s.: Some people might be wondering why I am spending so much effort on this single percentage computation. This is because I believe in making StocksCafe better (more accurate or more perfect) one step at a time.


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