Compound monthly, not yearly

One of my biggest leaps of enlightenment as I was tinkering with my spreadsheets was when I realized the true value of my monthly percentage growth. As I kept track of my portfolio’s performance, I would note the balance of my portfolio at the end of the last trading day of the month. From there, I would subtract the amount of money I added to my trading account inside of that month. Then, I would subtract my previous month’s ending balance. That would give me my earnings for the month. Formula is below:

End of Month Balance – Cash Invested – Previous Month’s Balance = Earnings

From there, I would divide my Earnings with my Previous Month’s Balance to get the percentage value of my month’s growth. Again, formula is below:

Earnings / Previous Month’s Balance = Percentage Growth

I would get percentage growth numbers that averaged around 2% in my early months. I thought this wasn’t impressive until I compounded this month on month; I was pleasantly surprised to find out that 2% every month doesn’t give you 24% at the end of the year, it gives you 26.82%.

I then computed different monthly growth rates and put together the table below:

Things got more exciting after that. Studying the table I had put together, I realized that if I could raise my monthly growth average to 6% every month, I’d end up doubling my money after 12 months. That’s a whopping 100%. Actually, 101.22% to be exact and based on my computations. If I raised my monthly average further to 10%, I’d end up with total growth of 213.84% after 12 months. That means I’d have more than tripled my money! Whoah!

I was blown away. I have since worked hard and have been able to improve my performance to a current monthly average of 6.45%. I’m using a simple 4-month moving average. If I can keep that up, I’ll have phenomenal growth years down the line. Plus, I’m still adding money regularly to my trading account every month which further boosts my capital – more money to grow.

Tracking my portfolio on a monthly timescale does wonders for my investment perspective. It allows me to better gauge how I’m actually doing against my long term growth targets. I feel better about my performance because even though I’m slow and steady, I can see very clearly that I am right on track. Excel is now officially my most important app. It used to be Photoshop because of my job.

My recommendation then to you is do track your portfolio monthly and keep meticulous records. If your current time scale is per year, you end up waiting too long to see your numbers. By the time you check your performance and can make adjustments, one year will have already passed. That’s too slow. Tracking on a shorter timescale allows you to be nimbler. You can make changes mid-course and be more efficient.

In closing, I exhort you to change your perspective. When compound interest is discussed, the examples given are usually interest per annum. I used to think 20% per year was impressive. I now know that that is nothing compared to 6% a month which when compounded for 12 months is phenomenal! Make that leap of understanding and see your investment in a new, more exciting light.