There are a few different ways of showing the performance of your investment portfolio, including as a traditional “equity” curve that shows how the total value of your portfolio has fallen or risen over time.
The problem is that this kind of equity curve is only really representative if you deposited an initial some which you never added to or took away from during the life of the equity curve. If you did make any withdrawals or deposits along the way then your equity curve wouldn’t be a true reflection of what happened… unless you performed some kind of unitisation calculations.
In any case, some might say that the acid test of whether you’re making money by spread betting is whether to have taken more money out of your spread betting account than you even put in. If we look at an alternative equity curve based on Money In / Money Out (MIMO), we can really see whether we’re in the money by only counting our chickens when they have truly hatched.
Consider the following alternative equity curve for a “model” position trading spread betting account that I established at the very end of last year.
The portfolio was actually doing rather well (which you can’t actually see) such that on 1 February my spread betting account was able to pay me back £75 of the money it owed me, thereby taking my overall deposited cash down to £425.
Either because the portfolio started performing poorly, or because I saw many good ‘opportunities’ to deploy my cash, I re-deposited the £75 and more besides over the subsequent months such that the spread betting account “owed me” £775 at the end of July.
This approach to visualising performance treats the spread bet portfolio itself as a “black box”, with “paper profits” (even internally banked ones) being merely paper profits until they are truly realised by withdrawing the originally-deposited cash from the account.
This story has a happy ending because the portfolio was profitable; so today on 10 September I was able to withdraw £950 (the final red column) which realised £175 worth of truly-banked “winnings” over and above any monies that I ever deposited.
I didn’t really “cash in” today, but I could have done so if I’d wanted to. Alternatively I could have withdrawn £775 and left the remaining £175 of “Other Peoples Money” to continue trading. Instead, I want to see how this alternative equity curve continues to play out over time.
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Disclaimer: this posting is for general education only; it is not trading advice.