Portfolio Allocation and Rate of Return

By | February 18, 2018

I recently restructured my investment portfolio management schema (no actual sells / buys to redistribute) to better focus and track my different investment categories and the expected rates of return – as result of risk management.

The four categories selected are working well (Cash, Capital Preservation, Income Growth, & Capital Growth); but, a simple method of calculating and monitoring the internal rate of return did not receive any thought.  Upon reflection, each category has a targeted overall annual rate of return (i.e., respectively, 0%, 3%, 5% and 8%).  I will defer discussion on the correctness of those values for now.  The internal “Return on Capital” is the best metric i can see as of now.  I want to preserve the ability to move capital to any category based on my strategic guardrails (% allocated to category) and especially to where the best values are presented.

Metric will be Internal Rate of Return on Capital – total value / invested capital.  New investments in the category will impact the annual rate of return, but over the long-term that should balance out in the noise (unless materially valued capital is introduced newly to the specific category).  Tracking this will require a bit more work, and i will focus on quarterly changes, not daily / weekly / monthly.


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