What is NAV?

It's the answer to the question, "how am I doing?" After taking all the steps needed to find great investment ideas, how do you then measure and compare the success of those ideas as investments? At Marketocracy, we think the best way to track your performance is to do it the same way that mutual funds track their own performance, using Net Asset Value per share.

If you're a typical investor, you want to know how well your investments are doing over time. If you only buy one stock and then hold onto it, it's pretty easy to figure out how you're doing by simply comparing the current value of the stock to the amount you initially invested.

Things get a lot more complicated once you have multiple stocks in your portfolio and you're buying and selling shares at different times for different prices. Performance gets even harder to measureif you invest additional cash or take money out of the portfolio every once in a while: adding cash to the portfolio increases its value, but not its peformance. Net Asset Value provides a way to objectively measure your performance over time in spite of all the changes you make to your portfolio. Since other investment vehicles like mutual funds use NAV, it also provides a way to compare your performance to professionally managed funds and indices, like the S&P 500.

NAV per share = Current value of fund holdings / # of fund shares

eg: $100,000 / 3,333 = $30

A fund's share price, or NAV is the dollar value of one share of the fund's stock. The NAV is calculated by dividing the current value of the portfolio by the number of fund shares outstanding. For open-ended mutual funds, new shares are issued as money flows into the fund. Likewise, the number of shares outstanding is reduced as investments are redeemed. The NAV increases as the value of the portfolio's holdings increase. For example, if a share of a stock fund costs $30 today and $18 one year ago, there has been a gain (or profit) of $12 a share, or about 66%, before fund expenses. The change in a fund's NAV determines its performance. Comparing NAV performance enables investors to differentiate funds on a relative basis.

NAV per share is a reliable, credible, and accepted measuring stick for portfolio performance.

Tracking Fund Performance

For the majority of investors, investment performance is ultimately the most important factor in determining which mutual fund to invest in. A mutual fund's performance can be measured in several different ways, depending on its investment objectives. Whether a fund aims for long term growth, current income, or a combination of the two, investors can track fund performance and judge profitability by:

• Following changes in share price or net asset value (NAV)
• Calculating total return
• Figuring yield

While each calculation enables investors to compare a fund's performance to similar funds offered by different companies, there is no simple calculation for comparing funds to individual securities, because each return is figured differently depending on the type of investment.

As individual investors, we are all investment managers- of our own portfolios! Therefore, to accurately answer the question of ìhow are my investments doing?î we need to gauge our investment performance at the portfolio level, rather than by each individual security. Utilizing the net asset value (NAV) method of performance tracking allows us to measure the performance of our entire portfolio and accurately compare our results with the universe of professionally managed funds.

The NAV method is also the only accurate means of accounting for cash placed into, or taken out of, an investment portfolio. New investments in the portfolio are made at the closing NAV on the day of the investment. Similarly, money taken out of a portfolio is taken out at the NAV on the day of the withdrawal. In either case, because a fundís shares increase or decrease with the flow of investments, accurate performance measurement is assured. Remember, the net asset value equals the value of the fund investments divided by the shares outstanding.

Sample calculation:

Notice the new investment on day 2 increases both the fundís total portfolio value and shares outstanding. To calculate investment performance, find the difference between the beginning and ending net asset values and divide that number by the beginning NAV.

To use this method of performance tracking for your own portfolio, choose an arbitrary number of shares outstanding and calculate your NAV. Note that in getting started, it is not important what number you choose. Here at Marketocracy, for example, we choose 100,000.

When new investments are made, look at the closing NAV on that day and divide the amount of your new investment by it. This will give you the correct number of shares to add to your portfolio shares outstanding. Do the same calculation when you take money out of your investment portfolio, but subtract the equivalent number of shares from the total portfolio shares outstanding. For instance, if you were to withdrawal $20,000 from the above portfolio on day 4, the shares of the portfolio would be reduced by 1,147.45 ($20,000 divided by $17.43 = 1,147.45). The shares outstanding would then be 99,269.22.

Total Return % = (Change in Value + Dividends) / Cost of Initial Investment

eg: $2,000 / $7,000 = 28.57%

A fund's total return is the annual amount your investment changes in value, plus any distributions, divided by your initial investment. Of course, if additional purchases are made, or some shares are redeemed, this will effect your total return. When considering total return it is important to remember that two people invested in the same fund can have different total returns, depending on when they each invested. The NAV method of performance tracking mentioned above addresses this issue and is the easiest way for us to account for additional purchases or sales of an investment and to accurately compare our results to professionally managed funds.

Yield % = Distribution per Share / Price per Share

eg: $0.68 / $20 = 3.4%