Category Archives: Finance

This is a collection of posts about home finance, and maybe some rants about the stock market.

Robinhood’s use of SRR in portfolio performance reporting, and why I don’t use it to track my investment performance.

Cover Photo by bruce mars on Unsplash

Something I just noticed today and thought it would be worth sitting down and writing out a brief post about it. I wanted to share this since it’s a pretty important bit of information for anyone just getting into trading stocks.

If you’re a Robinhood trader, you should be aware that Robinhood includes deposits as part of the portfolio returns they report within the app, and the website. This means that they are reporting returns using a Simple Rate of Return:

EMV = Ending Market Value
BMV = Beginning Market Value

This is bad for two reasons:
A) It’s not an actual measure of trader performance
B) It can vastly overstate returns, as well as vastly understate returns depending on your deposit strategy.
C) It can underreport the impacts of large market swings, and how you’ve done in the interim.

Simple Rate of Return is just that, very simple to calculate. It’s generally used to track indices and things where inflows and outflows of cash are not important to track for performance reasons. You’re only seeing a very simple view of performance with an SRR.

Another way to calculate returns is to use an IRR (Internal Rate of Return).

DtDUG = Date to Date Unrealized Gains
DtDRG = Date to Date Realized Gains
DV = Dividends
Int = Interest
PA = Purchase of Accrued Interest (For Bonds)
SA = Sale of Accrued Interest (For Bonds)
∆ai = The change in accrued interest from the beginning of period to end of period
MaxFees = Remove any fees paid (commissions) during the period. This is optional but recommended
BMV = Beginning Market Value
⅀Cashflows = This is the sum of all cashflows for the period
(di/td) = Date of Flow over days in period ( IE if a $200 flow happens on the 15th of November h, it would be 200*(15/30) )

The nice thing about an IRR is that it does include the size, and timing of cash flows to create a more specific and useful measure of portfolio return. However while it accounts for them, IRR still includes the cashflows of a portfolio in the calculations, so these can skew your overall measure of how good your trading strategy is doing.

The last and most complex measure of performance that I’ll cover here is the TWR (Time Weighted Return)

The IRRs taken here are between each cash flow, so every deposit or withdrawal that’s made comprises a new IRR to remove the impact of the flow on the return.

While it seems like it’s more simple than the others, the TWR includes all of the accounting for the IRRs, and chains them together into a return stream to offset for the individual flow based IRRs. By doing this it’s removing the effect of the cash flows in the portfolio and actually focuses in on the actual performance of the investments in the portfolio rather than the cash movement muddying it up.

For my deposit strategy I tend to do big chunks here and there, and am not regularly adding to my Robinhood account until I have a purchase I want to make. Because of this the Robinhood SRR under-reports my returns. If you are following good financial advice and adding a bit every month, this would greatly inflate your RH returns as it wont account for market movement very well. It’s important to track your real performance so you can measure the effect of different strategies. I tend to use different brokerages to track different strategies because I can break up the performance by account. Some trading platforms allow you to break up the accounts within the platform as well, which is also helpful. Example from my own account. First graph is RH, second graph is from PersonalCapital (Which does a Time Weighted Return, if you use my link to sign up for an account we both get $20)

Top graph is screenshot from my Robinhood portfolio, bottom graph is run for same period on only my Robinhood account in Personal Capital.

I really like PersonalCapital because I can pull all my investment accounts into one place, and report on performance in a unified manner. I have upwards of 13 financial accounts loaded to it right now and I get to see everything on one dashboard which is amazing.

I love being able to report on individual accounts as well as the mix so I can see how my overall plan performs against the market as a whole. If you’re serious about investing and growing your wealth, I cannot recommend PersonalCapital enough.

What can make an entrepreneur successful?

What makes a successful entrepreneur and why?
Perseverance. No really. You can be a brilliant MIT graduate with all the connections in the world, and a groundbreaking technology, but nothing happens overnight. You have to be able to stick with it through all of the trials, all of the awful pitches, all of the no’s, being broke, being lonely, being frustrated. If you don’t have the grit and will to push through all of the negatives of being an entrepreneur, and just survive, you wont last too long. Rarely do you found the next Instagram or Snap chat, going viral overnight and being picked up for billions in a matter of a year or two. Often you slog through horrors until the market is ready for you, it might be 3 years, it might be 20 years.
 
What skills or traits do I need to be an entrepreneur? 
Entrepreneurs need to be able to take in a lot information, and glean some insights from it to apply to what they are doing. I read constantly, and am always surprised at what can spark ideas or solve problems. Being able to look at a 30,000 foot view of a problem, do a quick survey of an industry or area of science, and then zoom in on a solution is a really important ability to have.
Entrepreneurs usually need to be humble as well. There’s always someone who’s been there first, always someone who’s smarter than you, and always someone you can learn from. If you go in like you’re the end-all-be-all you wont attract the right people to make yourself successful.
 
How do I succeed? 
Beyond what I said above, you really need to commit to it. It’s a lifestyle, and if you have a family, the whole family becomes an entrepreneur family. It might mean no vacations, a smaller house, tighter budges, and often meager Christmases. If everyone isn’t committed to it, you’re going to have a lot of distracting strife. You have to be able to keep motivated and sacrifice today’s comforts for tomorrow’s returns, always looking at the long game.
 
Pro-Tips for entrepreneurs
  • Learn everything you can, from everyone you can.
  • Network like crazy, always provide value to people you meet, and be humble in the process.
  • Find a mentor who’s been there before.
  • Have your own house in order.
That last one is probably the most important part. Personally, professionally, financially, you have to have your ducks in a row or you’ll miss opportunities. Your finances need to be awesome so you can A) have enough money to take opportunities and make leaps of faith, and B) when you’re in due diligence you should probably have decent credit, or a great story why you don’t. I meet a lot of entrepreneurs that put more value on the lifestyle, and looking and acting like an entrepreneur than they do in actually being an entrepreneur. If you walk into my office hours with all the gadgets, a $2,000 suit, and a BMW, but complain you don’t have enough cash to bootstrap, I can’t feel sorry for you because you did that to yourself.

Money out of nowhere

Late in 2013 my wife announced that we’d be expecting our first child in 2014. Early on we’d decided that when Mira was born, she’d quit her job and be a full time mom.

The next spring it finally dawned on me that we’d be cutting our income by about 35%, and with our current budget that would be…  Problematic. The nice thing was that I had very good job security and our savings were relatively healthy, but our cash flow would be too crimped

Triage

When looking at our budget, I pinpointed a few low hanging fruits:

  1. Tax Inefficiency
  2. Credit Card Debt
  3. Incorrect escrow on our mortgage
  4. Student Loans
  5. Cellphone bills
  6. Cable Bill

To me, it was important to take out the big chunks first if I could, to get our monthly cash flow up enough to really make a difference for our budget.

Tax Inefficiency

I did a bunch of research and found that when you have a child, you can get the child tax credit for the entire year. This, can be a massive savings on your per-paycheck tax amount. I worked with my HR representative at work to figure out the correct deductions, it all worked out to about $500 a month in extra cash in our pockets. The caveat to this is that you’re going to forego a bigger tax return next tax season, but personally, I don’t see a point in giving Uncle Sam a tax free lone every paycheck.

Credit Card Debt

This was a big struggle for me. We had some debt on an interest free credit card (American Express), but when it’s interest free, what’s the harm in carrying the debt? Well, the harm is that if you get into a cash flow crunch and you reduce your payments on your interest free debt, it can catch up with you pretty quickly. You don’t want to be on the receiving end of a years accrued interest. I bit the bullet and paid this off out of our savings, which reduced our monthly expenses by another $360 a month. It was painful, but rewarding in the end.

Incorrect escrow on our mortgage

This was an odd one that took some research. We’d purchased our house the previous year and when they estimated our taxes and insurance they actually estimated our monthly escrow far too high. Most things I read online said that you had to wait for the next year for the escrow to re-balance automatically, but I ended up making a slew of phone calls and was able to get the mortgage company to correct our escrow amount, the overage was refunded at the end of the year. The overage would have been refunded at the end of the year anyways, but money now is always better than money later. This saved us about $ 145 a month, and at the end of the year we got a check for $800.

Student Loans

Between my undergraduate and graduate degrees I ended up with quite a lot of student debt. We were shelling out over $1000 a month towards my student loans, and this was far and away the most painful thing. At the same time though I was very concerned about reducing my payments, which would result in a halt on any progress we’d been making on them. Unfortunately, this would shave another $220 a month off of our monthly bills, so I bit the bullet and put my federal loans onto the Pay as you Earn plan. We’re doing a bit better financially these days, so I’ve upped our payment significantly to try to get back lost time.

Cellphone bills

At this time we were shelling out $180  a month to Verizon between my phone and my wife’s. She had a pay-as-you-go phone, and I had a smartphone with a data plan, which was required for work. I got a little bit of reimbursement from my job, but it barely made a dent. I knew there were better options out there, so I started researching. For a long time, I was torn between TING and Republic Wireless.  Ting is nice because if you already have an AT&T device, you can use it on their network and save a bit of up-front cost. The monthly carrying cost for Ting (In our situation) was a bit higher than Republic Wireless, and even though we had to purchase two phones to move to Republic Wireless, we still came out ahead after only a few months. Since my wife would primarily be at home with our daughter, we got her the cheaper MotoG with the 3G data plan. Since I need internet for work and travel, I got the more expensive MotoX. All in we had to spend about $400, but it saved us $120 per month, so the payback period was very short.

Cable bill

This one was a lot easier. We’d been paying $90 a month for cable, but we also have Netflix and Amazon Prime. We decided to drop our cable down to internet only, and shaved only $40 per month off of our expenses.

In the end, most of these cuts were easy to accomplish, and weren’t very painful. We also cut down on our eating out, shopping expenses, and other items. I’ll blog more about those at a later date.

All told, we were able to either reduce our expenses, or increase our cash flow by $1385 per month.