I am doing a research on the proper ways to calculate portfolio returns.
The condition: The underlying asset is physical gold bars. Just gold, purchased from 1 particular seller.
Currently i have two approaches. Consider the following:
trx_date gold_amount buy_unit_price total_amount
01/06 10gr $100 $1000
02/06 10gr $110 $1100
03/06 10gr $120 $1200
04/06 10gr $90 $900
Assumption: Today's sell price is $115
The first method would be calculating as follows:
- I calculate all the money i've spent to purchase gold in the past i.e. ($1000 + $1100 + $1200 + $900 = $4200).
Then I find out the value of my gold using today's sell price i.e. ((10gr + 10gr + 10gr +10gr)* $1050 = $4600).
Finally, i calculate the return of my investment using the following formula
(present value - past value)/past value, i.e. (4600-4200)/4200 = 0.095
I found this method here https://financetrain.com/how-to-calculate-portfolio-returns/
Which essentially taking into consideration the weight and the return of each time i "top up" my investment.
I would like to know which methodology is preferable and why ? (or perhaps there's a better approach to this).
Edit I tried both approaches and end up with similar result. Now i just need to find a justification why 1 methodology is preferable compare to the other.