Tag: investing

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Financial Literacy Financial Technology Investing

Navexa 3.0: A New Breed Of Portfolio Tracker

In October 2023, we unveiled a major new update to the Navexa Portfolio Tracker. Here’s an explainer on the key changes.

Navexa started life as a basic portfolio tracking tool. Today, it’s developed into a multi-asset, multi-market platform that gives investors professional-level portfolio tracking and analysis on a level no other tool can match.

In October 2023, we launched the most advanced iteration of Navexa to date. In this post, we explain the changes and walk you through a few of the powerful new tools we’ve created to make understanding and optimizing your investments easier than ever before.

Watch our Navexa 3.0 Webinar

We revealed and explained the latest iteration live on a webinar for our customers. Watch the replay free — just click the player:

Navexa 3.0: The Philosophy Behind The Redesign

Navexa started life in 2018 as a basic portfolio tracking tool. It quickly evolved, supporting more markets and offering more solutions to the all-too-common problems investors encounter trying to accurately track and analyze their long-term investment performance.

Today, we’re shedding our reputation as ‘another portfolio tracker’ and revealing four big new changes and additions to our platform.

Here, we introduce and explain the key new tools and updates, and show you why Navexa now offers performance tracking and portfolio analysis tools distinctly different from other platforms.

New: Portfolio Overview Screen

The most visible update we’ve made to Navexa is the new Overview screen:

The idea behind this screen is that investors can see all their key portfolio performance metrics at a glance in one place.

While previously (and on other platforms) you needed to visit different parts of your account to find everything you might need to know, the new overview is effectively a one-stop shop for checking your portfolio’s vitals.

The five key metrics at the top of the chart (value, gain, income return, currency gain and total return) are now clickable — clicking each will display a chart for that specific metric.

Below the chart, you’ll find four bar chart panels.

Clockwise from top left:

Holding Performance: A list of the top performing holdings in the portfolio.

Category Performance: A list of the top performing sectors in the portfolio.

Diversification: Select from holding, exchange, sector, industry and currency to view the portfolio’s diversification.

Income Return: A list of the highest income-earning holdings in the portfolio.

The first three panels all have clickable dropdown menus. You can customize what they show, like return, value, dollar or percentage.

This screen lets you both understand your portfolio performance at a glance, and allows you to drill down into greater detail. Just click the bottom of each panel to access the corresponding report based on your settings.

New: Filtering System

A key tool in Navexa 3.0 is the filter system.

This small, but powerful, tool allows you to ‘filter’ what you view throughout your account.

Click it and select from the dropdown (holding, exchange, sector, industry, currency). This will prompt you to make a selection.

Once you choose your filter, your account will reload, and all the charts, metrics and reports will apply only to your selection.

Note: Your filter selection remains as you move throughout your account — you’ll see it above the chart, and can click the ‘X’ to remove it and revert to an unfiltered view.

New: Benchmark Analysis

You’ve long since been able to choose your portfolio performance benchmark in Navexa.

But whereas previously, this was a simple addition to the main portfolio performance chart, we’ve now created a new Benchmark Analysis page:

Like the Overview screen, the Benchmark Analysis chart features clickable metrics along the top. Click each to view the corresponding performance chart and benchmark chart together.

You can edit the benchmark both on this page and on both the Overview and Portfolio screens.

Below the chart, you’ll find two panels with bar charts:

These display which holdings (or sectors, exchanges, currencies, or industries) are overperforming and underperforming relative to your selected benchmark.

New: Income Calendar

We have another cool new tool for you — the Income Calendar.

Where previously Navexa could only forecast confirmed upcoming dividends, the new Income Calendar lets you estimate portfolio income 12 months in advance.

The solid coloured bars represent confirmed income, and the shaded bars represent predicted, or forecast, income.

Navexa calculated the predicted income based on the previous year’s earnings.

Below the chart, you’ll see a list of holdings and income ordered by date.

More New Stuff: Charts, cash account options & more!

We have left no stone unturned in this latest big upgrade.

You’ll also now find a Sankey chart for analyzing your portfolio income, the option to rename cash accounts, a slew of UX improvements (like labelling, and switching between showing open or closed positions).

Navexa 3.0 is live now — start tracking today!

Ready to start tracking and analyzing your portfolio?

Start tracking with Navexa today.

Go here to get started!

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Financial Literacy Investing

The Rule of 72: What Is It, and How You Can Use It In Your Investing?

Using the Rule of 72 is a simple method for getting an approximate idea of how long it takes for your money to double. So how can you use it in tracking your investments?

In a perfect world, investors would like to know, in advance, how long it will take to double their money in the stock market. Knowing exactly how long this will take is helpful in planning out portfolio diversification, and eventually achieving financial freedom.

But, how does one go about working out how long it might take to double the value of a portfolio?. Investors can easily become confused. Especially when it comes to accounts that receive annual interest. Then, they may reach for complex formulae, and spreadsheets. 

But, there’s a simpler, better way of calculating the period it will take to double one’s investment.

One of the best ways is to use the Rule of 72 — one of the simplest methods of calculating when one’s portfolio will double in value.

What is the Rule of 72?

The Rule of 72 refers to the mathematical concept that shows how long it will take an investment to double in value (in theory). It’s a simple formula that anyone can use to determine the approximate time when an investment will double at a given annualized rate of return.

However, the Rule of 72 only works for calculating compounding growth. Investors can use the Rule of 72 only for an account that earns compound interest, not simple interest. Additionally, the Rule of 72 works better with an interest rate ranging from 6% to 10%.

Besides being used to show exponential growth of a portfolio, the Rule of 72 is also used to show exponential decay. For example, the loss of purchasing power caused by inflation, or the drop in the population numbers.

Compound Growth vs. Simple Growth

Interest helps the portfolio growth, and allocating a certain amount of money to an account that earns interest is a smart move investors make. There are two types of growth, or interest — simple and compound, and these are crucial for using the Rule of 72.

Compound interest is added to the already existing interest, plus the principal amount of the loan or deposit.

This type of interest is calculated with the following formula:

A = P (1 + r) (n)

On the other hand, simple interest is added only to the original investment. The formula for simple interest is:

A = P (1 + Rt)

Compound interest is better, as it can reduce the time required to double the money in an account, and grows the investments exponentially.

In other words, compounding interest grows an investment more and more every year, since the interest gets calculated on progressively larger amounts. Whereas simple interest doesn’t compound on itself over time. 

Origins of the Rule of 72

While it may sound surprising, the Rule of 72, and the concept of interest aren’t new ideas. Even ancient civilizations, such as the Mesopotamian, Greek, and Roman, used them in transactions, and basic money management.

While it may not have been called the Rule of 72, it was always around. For example, lenders always wanted to know how to manage their investments, and the rate of return.

Who Came up With the Rule of 72?

The first person to ever take note of the Rule of 72 was Luca Pacioli. Pacioli was an Italian mathematician. He mentioned the Rule of 72 in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Summary of Arithmetic, Geometry, Proportions, and Proportionality), published in 1494.

Pacioli stated that people who wish to know how many years it will take to double their investment should always ‘keep the number 72 in mind.’

Pacioli never went deeper into defining or explaining the reasoning behind 72.

With that in mind, it could have happened that someone else invented the number to improve their calculation of the interest rate, and portfolio growth. Some even say that Albert Einstein was the one to invent the Rule of 72, but that was never confirmed.

Why Is It Called the Rule of 72?

There’s no specific reason this rule is called the Rule of 72. Still, it serves to replace the complex logarithmic calculation that most investors are having trouble dealing with. The exact formula for determining how many years it takes to double your money based on compounding interest, or growth, is:

ln(2) / ln(1 + (interest rate/100))

where “In” represents the natural log value.

Good mathematicians could use this formula to get accurate results by observing return rates, and natural logs. The actual number that’s derived from the formula is 69.3. However, since this number is not easy to work with, people usually replace it with 72, since it’s equally good in showing the approximate number of years necessary to double the investment.

Navexa’s portfolio tracker is even easier to use. Our portfolio tracker automatically calculates every aspect of portfolio performance for shares, cryptocurrency, cash accounts and more. 

How to Use the Formula?

To calculate how long it would take for the investment to double in value, one can use the following formula:

Years to double = 72 / expected rate of return

This method can also be used to calculate the expected rate of return.

Investors should divide 72 with the years to double to get the rate of return on their investment (expected rate of return = 72 / years to double).

This principle handles fractions, or portions of the year. Plus, the resulting rate of return includes compounding interest on the investment.

However, there are a few things to pay attention to:

  • the interest rate should not be a decimal
  • this formula should be applied to an investment that receives annual interest (compounding)
  • the farther the interest rates are from 8%, the less accurate the results would be
  • to calculate lower interest rates, one can drop the number to 71
  • this formula is easily divisible, but not perfectly accurate

Rule of 72 — Variations

Since this principle provides an approximate result, sometimes investors use slight variations, like the Rule of 69, Rule of 70, or Rule of 73.

These numbers are used in the same way, and serve to calculate the years required for the investment to double in value.

Rule of 72 — Examples

Here’s a simple example of using the method to calculate how long it takes for the investment to double:

Let’s say an account earns 4% of annual interest.

dividing 72 by 4 would give the years it takes for the money to double – 18.

When used to show inflation, and other deprecating numbers, the formula is the same.

However, the final result will show the years it will take for the amount to be cut in half.

Since this principle provides an approximate result, sometimes investors use slight variations, like the Rule of 69, Rule of 70, or Rule of 73.

Both novice, and experienced investors could use the Rule of 72 to estimate the doubling time of their holdings. Since the Rule of 72 is easy to use, almost anyone can estimate how long it will take for a certain number to double in value.

Who Uses The Rule of 72?

Since this rule can be used outside of personal finance and investing, it’s also used by other experts who need to estimate how many years it will take for a value to double.

What Is the Rule of 72 Good For?

The Rule of 72 is a good method that can be applied to anything that grows (or decays) exponentially. For example:

  • GDP
  • Inflation
  • Investment compounding interest rate
  • Credit card debt
  • House mortgage
  • Car loan refinancing

How Does the Rule of 72 Work?

By using the Rule of 72, investors can get an approximation of the years it will take for their assets to double in value.

This makes the Rule of 72 one of the key personal finance formulae to understand for investingt. Plus, this rule gives a general idea of how many “doubles” an investor might get during their lifetime, or for a certain period.

Does It Show Accurate Results?

When it comes to the accuracy of this rule, the Rule of 72 provides approximate information about the desired time period.

This formula is a simplification of the more complex logarithmic equation. Investors who wish to get an accurate result would have to do the entire calculation, or use an electronic spreadsheet calculator.

Navexa’s smart portfolio tracker replaces the spreadsheet. It automatically shows portfolio growth, and helps investors get a clear insight into the years it takes to grow their wealth.

What Are the Things the Rule of 72 Can Determine?

As we previously mentioned, this rule is usually used to determine the rate of return on the investment. However, experts in various industries can also apply this principle to anything that is compounding, and this doesn’t necessarily involve money.

For example, a city’s population that grows/decreases by a certain percentage per year can also use the rule to check how long it would take for the population to double, or halve.

Limitations of This Principle

Besides not being completely accurate in showing data, this formula is also mainly applied to compounding interest accounts, not simple interest ones. What’s more, the Rule of 72 works better for lower interest rates, and is less precise as the interest rate increases.

Additionally, this calculation can’t be used to forecast how long it might take to get a double return with decentralized finance and cryptocurrency, due to high market volatility, and sudden changes in prices.

In fact, no calculation can give anyone a 100% accurate prediction of what their investments may or may not do in the future. 

Speculating Future Returns With The Rule Of 72

When people invest, they often want to know how long it will take to double their money. However, predicting the exact number of years can be tricky. 

This is why the Rule of 72 exists. When used correctly, with an investment that involves compound interest,this formula is generally fairly accurate — provided, of course, the annualized rate of return remains consistent.

here are certain limitations investors should be aware of. This mathematical concept works only with accounts that receive compounding annual interest at lower rates. 

The higher the rates go, the less accurate the results will be. 

This principle doesn’t work with simple interest.

On the other hand, investors can slightly change the number, based on their annual interest rate. For example, some may use 69.3, or 73, depending on the percentage of their rate.

The Navexa portfolio tracker and reporting platform is a fast, accurate way to determine your annualized rate of return across shares, ETFs, cryptos, cash accounts and more. We handle all portfolio performance calculations behind the scenes so you can focus on better understanding your portfolio and returns. 

Categories
Financial Literacy Investing

How to Calculate Cash Dividends: A Complete Guide

Managing a complex portfolio and calculating cash dividends might be challenging. Here’s how it can be done with ease with a few formulas — and with the Navexa portfolio tracker.

Most people who consider investing are familiar with owning stocks. Some are also highly interested in receiving a dividend payout. Those who go deeper into researching an investment, might decide on purchasing stocks of companies because that pay cash dividends.

Dividends might help investors maintain a stable portfolio, remain invested in quality companies, and earn a profit, all while holding shares.

However, novice investors may find dividends confusing — especially when it comes to calculating their dividend yield per share. 

The traditional way to calculate dividend per share is using the company’s income statement and similar reports. But, there are other, easier methods, too.

Dividends Explained

Cash dividends are payments companies make to shareholders from their profits.

A dividend is defined as a distribution of a company’s earnings or stocks to a class of its shareholders. Dividend payouts are determined by the board of directors, and shareholders receive them for as long as they hold the stock.

A dividend is a form of reward to shareholders for investing in the organization and for holding the stock. Dividends may also help a stock’s price remain relatively stable.

Some companies offer dividend payments and prefer to keep the shareholders satisfied. Others decide not to pay dividends, instead reinvesting profits back into the company.

Dividends are paid monthly, quarterly, or annually, depending on the company. They’re paid at a scheduled frequency, so investors always know when they’ll receive the profit from holding shares.

Receiving a dividend based is a great way to increase one’s income, but there’s more to it.

Shareholders also pay attention to other factors, such as dividend yield, rates, retention ratio, and other key numbers.

Dividend Rate vs Dividend Yield

The dividend rate is a percentage that shows how much the company pays in dividends annually, relative to its stock price. The dividend rate can be fixed or adjustable, and it’s expressed as a dollar figure.

The dividend rate is calculated with the following formula:

Dividend rate = dividend per share / current price

On the other hand, the dividend yield is expressed as a percentage, and shows the ratio of a company’s annual dividend payout, compared to its share price.

Shareholders can calculate the dividend yield by using the following formula:

Dividend yield = annual dividends per share / current share price x 100

Navexa helps share investors by calculating dividend performance automatically. Navexa’s app is easy to use, and tracks multiple types of investments. This includes tracking and reporting on cryptocurrency investments.

Dividend Payout Ratio vs. Retention Ratio

The dividend payout ratio shows how much of the company’s earnings after tax are paid to the shareholders. It’s in direct relation to the organization’s net income amount, and it’s used to measure the net income percentage.

It’s calculated by the following formula:

Dividend payout ratio = total dividends / net income

On the other hand, the dividend retention ratio represents the percentage of net income that the company keeps to grow the business, instead of paying it out to the shareholders as dividends.

It’s calculated by the following formula:

Retention ratio = retained earnings / net income attributed to stockowners

Calculating Dividends per Share and Earnings per Share

Dividends per share (DPS) is the number of stated dividends paid by companies for each of the shares outstanding. It represents the number of dividends each shareholder receives based on the shares they own.

DPS is often used to calculate dividend yield, and the formula goes as follows:

DPS = total dividends paid over a period – special dividend payout / shares outstanding

On the other hand, earnings per share (EPS) are useful in calculating how profitable the company is based on measuring the net income for each of the company’s outstanding shares. 

EPS is also an important number used to determine share price.

EPS shows whether investing in a certain company and holding its shares would benefit the shareholders and improve their net income.

For example, if the company reports an EPS that’s below a certain estimate, that might cause its share prices to drop.

The formula for calculating earnings per share goes as follows:

EPS = net income – preferred stock dividends / outstanding shares

Types of Dividends

Four types of dividends include cash, stock, property, and liquidating dividend.

There are several types of dividends that a company may pay to the shareholders. These include:

  • Cash dividend
  • Stock dividend
  • Property dividend
  • Liquidating dividend

Cash dividends are the most common. They represent a simple distribution of funds to incentivize shareholders to hold their shares, improve the shareholders’ equity, and increase confidence in the organization.

What Are Cash Dividends?

Cash dividends represent money a company pays to the shareholders per share they own. The money can come from the organizations’ current earnings or accumulated profit. Cash dividends are paid regularly, usually by quarterly or annual payments.

Once the shareholders receive this dividend, they may have the option to accept the cash payment, or reinvest in additional shares (known as a dividend reinvestment plan) and improve their position in the market.

The willingness of the company to pay cash dividends shows a solid financial strength, and positive performance, although that’s not always the case. Sometimes the companies may keep paying dividends, but still be in a poor financial position and eventually shut down.

This is why potential stock owners must be careful when investing and take everything into consideration before they invest in the organization.

Which Company Can Afford to Pay a Cash Dividend Yield?

Many companies have outstanding earnings, and can afford this form of dividend payout. These are just some of the companies that offer dividend payouts across the ASX, NASDAQ and NYSE:

  • IBM
  • AT&T
  • Johson & Johnson
  • QUALCOMM
  • Fortescue Metals Group
  • BHP
  • Magellan Financial Group

More experienced investors can easily determine which company has a solid income statement, and capital, which helps them invest in profitable shares. On the other hand, novice investors may struggle in finding the dividend shares worth investing in.

Potential stock owners must be careful when investing and take everything into consideration before they invest in the organization.

Still, investing in shares that pay these types of dividends can help both new and experienced investors increase capital.

Additionally, those who wish to invest often check out the company’s trailing 12 months (TTM). 

This is a set of performance data that shows how the organization managed finances in the last year. TTM is beneficial for understanding a company’s growth and potential.

Example of a Cash Dividend Payout

Here’s a simple example of a cash dividend:

One investor owns 100 shares of company X. At the end of a quarter, the company X calculates its financial performance for that quarter. 

The board of directors then reviews the information, and decides on a $0.50 dividend per share for the quarter.

This means that the investor is entitled to $0.50 x 100 shares = $50

How Does a Cash Dividend Work?

When a company earns enough, it may decide to distribute part of its earnings to the shareholders. This part of the earnings is most commonly distributed via cash dividends paid in regular intervals, usually quarterly.

While these dividends are a great way of motivating shareholders to stay with the company, they may cause the stock price to drop. Still, investors love companies that offer dividends, as they know they can count on regular payouts.

Why Does a Cash Dividend Matter?

There are many reasons these dividends are important to shareholders. For example, the cash dividends could signal whether the company has good financial health.

It may show that a company is more effective in using its capital, compared to companies that don’t pay dividends.

Dividend payment per stock also increases the chance of shareholders remaining invested in the stock. This means the company’s stock price may stay more stable.

Are Cash Dividends Better Than Stock Dividends?

When it comes to the cash dividend, shareholders have no other option but to either keep it, or reinvest it and increase the number of shares they own.

Even though these dividends are a more common way of paying shareholders, stock ones are sometimes considered better.

When it comes to the cash dividend, shareholders have no other option but to either keep it, or reinvest it and increase the number of shares they own.

With a stock dividend, they can keep the shares or turn them into cash. Plus, stock dividends aren’t treated as taxable, as they’re usually not turned into income.

The Advantages of Cash Dividends

There are many advantages of the dividend payout for shareholders. One of the main advantages is the steady income. These dividend payouts are regular, so shareholders know when they’ll receive the funds.

Regular payouts are especially beneficial for those who build a large portfolio with a view to living on the income.

Receiving dividend payments can also be a good way of establishing a market hedge. This defends the shareholders from the stock price dropping, which often happens during a bear market.

Furthermore, they know that companies that pay dividend yield may be more careful with their financial decisions, as they want to keep people invested in their shares.

The Disadvantages of Cash Dividends

While these types of dividends are common, and can yield great profit for investors, there are certain financial disadvantages for companies.

One of the major disadvantages to paying the dividend is that the money that’s paid to shareowners can’t be used to further develop the business. In a way, paying the dividend prevents the company from investing in increasing sales and profits. Instead, offering a healthy dividend might sustain or even raise the share price — effectively raising capital for the business. 

When it comes to shareholders, dividend payments mean they’ll have taxable income. However, if an investor has an income that’s too low to make them liable for tax, they may be entitled to a refund from the Australian Taxation Office.

Do Cash Dividends Go on the Balance Sheet?

A balance sheet is a financial statement that involves the company’s stock, other assets, liabilities, and shareholder equity. This sheet is also used to evaluate the business.

Dividends do impact the balance sheet, as they will show a decrease in the company’s dividends payable, and financial balance. The balance will be reduced.

To check the total amount of paid dividends, investors should also use a financial statement. This statement shows how much money is entering and leaving the company.

Why Do Shareholders Prefer Cash Dividends?

According to financial theory, investors don’t care much about whether they’ll receive cash or stock dividends, for as long as they have the same value. However, this approach doesn’t include other complexities, such as taxes, transaction costs, dividend payout, demographic attributes of investors, etc.

On the other hand, the theory states that investors would pay additional expenses for receiving cash dividends, and they may prefer them over stock dividends.

Some shareholders would rather pay the taxes and receive cash for their outstanding shares, than receive additional stocks, simply because of direct financial compensation.

Accounting for the Cash Dividend

These forms of dividends are usually accounted for as a reduction of a company’s retained earnings. After the board of directors allows this type of dividend payout, the company debits the retained earnings account, and creates a liability account called ‘dividends payable’.

By moving funds to a dividends payable account, the company reduces equity, which is instantly shown in the company’s balance sheet even though no money has been paid out yet. This, in turn, increases liability.

Once the payment date comes, the company then reverses the dividend payable with a debit entry, and credits the cash account for the cash outflow.

In that way, these forms of dividends don’t actually affect the company’s income statement. Still, all companies that pay these dividends must report the payments in the cash flow statement.

Calculating Cash Dividend

Calculating the dividend payout for the given year is done by subtracting the retained earnings from the beginning of the year from the end-of-the-year numbers.

Based on the complexity of these types of dividends, potential stockholders may struggle in finding the appropriate information they can use to calculate the dividend payout. In general, companies report their dividends in a statement they send together with their accounting summary to their stock owners.

Some organizations share the date in press releases. However, that’s not always the case.

Those who can’t find this data officially, usually consult the company’s balance sheet, which can be found in the annual reports.

Calculating Cash Dividend From a Balance Sheet and Income Statement

If the dividend payout is not explicitly stated in any public document, potential shareholders can look into two things:

  1. Balance sheet
  2. Income statement

The balance sheet is a record of the organization’s assets and liabilities. This document reveals how much the organization has kept in terms of retained earnings. Retained earnings are all earnings of the company that weren’t paid out as dividends.

The second document, which can be found in the annual report, measures the organization’s financial performance for a certain time period. The income statement shows how much net income a company had during a certain year.

This document helps determine what changes would occur in retained earnings if the organization had decided not to offer a dividend payout for that time period.

Calculating the dividend payout for the given year is done by subtracting the retained earnings from the beginning of the year from the end-of-the-year numbers.

This will give the net change in retained earnings, which should then be subtracted from the net income for the year.

The final number shows the total amount of dividends paid during the stated period.

Cash Dividend Per Share Formula

Those who wish to do their own accounting can easily calculate the earnings they receive from per-share dividend yield. After purchasing a stock that pays dividends per share, the shareholder would usually get quarterly dividend checks.

To find the dividend payment per share, the quarterly dividend payout should be divided by the number of shares.

To get annual numbers, the shareholder can multiply the quarterly dividend yield by four.

However, with Navexa, there’s no need to use complicated formulas to calculate the growth of a portfolio. 

Navexa is a smart portfolio tracker that manages accounting for its users. Our app makes investing simple, as it automatically calculates portfolio changes.

Navexa tracks and records every dividend payment — cash and reinvested — in a portfolio and provides insights into which holdings are earning the most and least in a given period. 

Plus, Navexa can annualize portfolio performance, and automate portfolio income tax reporting.

the Navexa portfolio tracker
The Navexa Portfolio Tracker allows you to track dividends alongside capital gains, trading fees & more.

Final Word On Calculating Cash Dividends

Owning dividend-paying stocks is an attractive proposition and a key part of many investors’ long-term wealth building strategies.

But while earning income from an investing is good, it’s vital that investors keep track of their dividend performance — whether that’s from cash dividends or reinvested dividends. 

This is important not just to understand and analyze how much a portfolio is generating in income (and how much that income contributes to overall performance), but because investment income is taxable.

Tax reporting requirements require that investors provide full details of their investment income.

That’s why we’ve built the Navexa portfolio tracker’s automated taxable income calculator. The tool calculates every last cent worth of income an investor needs to report for a given tax year, including details on franking credits (for Australian investors). 

It’s part of our mission to empower investors to build brighter financial futures with simple, but powerful, automated investment analytics and reporting tools.

Try NAVEXA FREE!
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Cryptocurrencies Financial Literacy Investing

How to Calculate the ROI of Your Crypto Investment

calculate your crypto ROI

Tracking a cryptocurrency portfolio might be challenging. Here’s what experienced inventors use to understand their crypto ROI.

Investing in cryptocurrencies can be challenging, especially for investors who are used to dealing with traditional assets. These investors often see the crypto market as highly volatile.

In addition, there’s a lot of market manipulation, which often causes drastic price movements.

However, most people get attracted to crypto investment and jump into a digital asset because of the possibility of a high return on investment.

Even the experienced trader who deals with gold might test out the waters and get into crypto, ready to take the risks.

Here’s how they calculate the ROI, rate of return, and their net profit.

Briefly on Cryptocurrencies

There’s a lot that can be said about cryptocurrencies, but new investors should know that it all started with Bitcoin (BTC) in 2009. It was the first-ever digital currency that introduced a peer-to-peer electronic cash system.

Once the first cryptocurrency started getting traction, others followed. Soon, a whole new market was born, and ever since, the financial industry hasn’t been the same. Cryptocurrency opened up many doors to investors who can now invest in these assets in several ways, such as:

  • Purchasing coins or tokens directly on the exchange
  • Investing in an Initial Coin Offering (ICO)
  • Investing via Initial Exchange Offering (IEO)
  • Getting into Crypto Exchange Traded Fund (ETF)

Some of the new options for investing in crypto include purchasing non-fungible tokens (NFTs) and lending money via some of the Decentralized Finance (DeFi) platforms.

calculating cryptocurrency ROI
How to calculate rate of return and net profit for crypto investments

Dangers of Investing in Cryptocurrency

Even though there are many ways to get introduced to crypto investments, novice investors often worry about the limitations regarding current and future regulations.

Many investors don’t consider the value, efficiency, or use case of the cryptocurrency they invest in. Some also completely ignore the technology behind the project and only follow a hyped community and current market sentiment.

This often results in a poor, emotion-driven investment decision, which brings a negative return on investment (ROI).

On the other hand, some investors are fortunate, and hit the nail on the head by getting into tokens which prove to be successful projects, bringing high ROI.

Still, those who purchased crypto and learned to manage the risks claim there’s a potential for a decent return on investment (ROI).

However, ROI depends on the current price of the asset and market fluctuations, which can be shaken with just one negative headline.

This is why calculating the rate of return and ROI can be tricky.

What Is Return on Investment (ROI)?

Return on investment, or ROI, is defined as the percentage growth or loss of investment, divided by the initial cost of an investment, multiplied by 100. ROI calculation measures the profitability of an investment.

On the other hand, the rate of return, or IRR, is the rate of all future expected cash flows of an investment. IRR measures the estimated return.

Both are used to measure the performance of investments, with ROI being used by individual investors or institutions and IRR being used by financial analysts.

ROI metrics are important for crypto investors

Positive ROI and Negative ROI

The difference between a positive ROI and a negative ROI is simple. A positive return on investment means that net returns are greater than any investment costs.

The negative ROI percentage shows the net returns are poor, meaning the total costs are greater than returns.

The Importance of the ROI Metric

ROI is the key performance indicator that shows how successful an investment might be. ROI calculation can be handled in two different ways:

  1. By using the standard ROI formula: subtracting the initial value of the investment from the final value of investment, and then dividing the number by the cost of investment x 100
  2. By using the alternative ROI formula: dividing net return on investment with the cost of investment x 100

Still, investors should be mindful that the annualized return formula often ignores the compounding that’s added to the initial value, which is why it might give incorrect results.

Tools Investors Use to Calculate ROI

There are many tools to calculate ROI, and experienced investors often don’t even have to use a formula to get the numbers right.

For example, Navexa is one of the best ROI and portfolio trackers people can use to keep track of the money they invested.

It’s a smart portfolio tracker tool, developed to pull data from all sorts of platforms, including crypto exchanges.

Navexa helps traders and investors see their annualized ROI with ease — bypassing the need to use any manual calculation.

what is cryptocurrency ROI?

What is Crypto ROI?

Crypto ROI helps investors calculate the performance and efficiency of their crypto investment.

By calculating crypto ROI, traders and investors also compare how different crypto investments perform against one another, and which asset has the highest potential of bringing more money.

What’s more, crypto ROI is a key metric in determining the performance of an asset compared to its initial price.

Calculating crypto ROI has become a popular indicator for Bitcoin, Ethereum, and altcoin traders and investors.

Crypto ROI is observed in the same manner as traditional investments ROI — if an ROI is positive, that means the investment is performing well — the price is increasing over a certain period.

On the other hand, if the value of ROI is negative, that means the asset has lost value.

When it comes to crypto, it might be tricky to know whether a crypto investment will bring ROI.

Digital assets often look quite appealing, especially to new investors, but the market is very volatile and high ROI often depends on multiple factors.

Why do Investors Measure Investment ROI in Crypto?

The most common reason investors measure crypto return on investment ROI is to see whether the initial value of the investment has increased.

Calculating crypto ROI gives the general idea of how profitable an investment is.

It also shows how the investor’s portfolio performance compares to the initial investment.

the Navexa portfolio tracker
Navexa tracks and reports on crypto returns & performance

How to Calculate ROI in Cryptocurrencies?

Investors usually calculate crypto ROI by subtracting the original cost of investment from the current value and then dividing it by the original cost.

Just like with traditional investment assets and markets, ROI calculation shows whether an investment strategy is working or not.

Is ROI an Ideal Metric?

While ROI is a powerful metric that shows the success or failure of the investment strategy, it has some flaws. For example, ROI doesn’t usually account for the time someone spent investing. This is why analysts often calculate annualized ROI, which shows the progress of profit or loss for a given timeframe.

ROI doesn’t explain the asset’s environment, market risk, and liquidity changes. This is why investors often rely on a few other metrics, and not just the ROI.

Those crypto investors who prefer trading to holding should also account for other factors and costs, such as trading fees, wallet fees for sending the coins, and any other metric related to their expenses.

They should also account for the dates when they bought and sold an asset.

The ROI metric doesn’t reflect the risk associated with purchasing, trading, and holding crypto, which is why investors must rely on additional data.

Crypto ROI Calculator

There are many crypto investment ROI calculators out there and most are super easy to use to calculate profit on crypto investments.

Navexa is one of the top crypto ROI calculator tools investors use to get the percentage of their ROI.

The Navexa portfolio tracker calculates performance for stock and cryptocurrency holdings, including capital gains, currency gain tracking, income tracking and more. Navexa is easy to use and free to start with, so both novice and experienced investors can test out its features.

Example: Calculating the ROI of a Bitcoin Investment

Bitcoin is likely the first asset investors get into when they start investing in crypto. Here’s a simple example of how people calculate the ROI of BTC.

Let’s say someone invested $2,000 into BTC. After a while, their $2,000 grew to $6,500.

They would calculate the BTC ROI following the standard formula:

($6,500 – $2,000) / $2,000 = 2.25 x 100 = 225% ROI

Return on Investment for Different Digital Assets

With so many different assets on the crypto market, each asset may have a different ROI. Those projects that have a more active community, and a better use case for their tokens may provide higher ROI to early investors. However, that’s not always the case and this post should not be considered financial advice!

Bitcoin is already a somewhat established asset, and its ROI has historically been the highest compared to other assets. On the other hand, Ethereum is the second-largest cryptocurrency after Bitcoin, but it just recently provided a higher ROI for some investors.

Some of the best performing assets currently include The Sandbox, Terra, Decentraland, and other assets that are related to the metaverse, play-to-earn gaming models, NFTs, and a few other new technologies in the crypto space.

However, experienced investors know that the crypto market is unstable and that ROI on most crypto assets can become negative if the coins face a massive sellout.

Final Word on Calculating Crypto ROI

One of the reasons people get into crypto is the promise of a potentially high ROI. However, getting great returns with crypto can be challenging. Still, measuring ROI can help investors make more rational decisions. ROI metric also helps people allocate the money in their portfolio in the right way so that they’re more profitable in the long run.

On the other hand, calculating ROI on a crypto investment could be tricky, as investors often forget to account for their trading fees and other expenses they managed.

However, with Navexa, getting a clear ROI metric is easy 🙂

Categories
Cryptocurrencies Investing Tax & Compliance

Tracking, Reporting & Paying Tax On Cryptocurrency In 2022

Australia crypto tax

Our guide to what is — and is not — taxable for cryptocurrency investments in Australia. From basics like capital gains tax from selling crypto, to paying tax on crypto staking income, declaring capital losses and understanding how the ATO treats DeFi.

If you’re buying and selling cryptocurrencies in the hope the Australian Taxation Office either won’t know about, or won’t be able to tax, your profits and income, I have bad news:

Crypto’s ‘wild west’ days — at least in terms of mainstream adoption and regulation — are gone.

While you’ll find many a tweet about how ‘it’s not too late to be early’, it is, in fact, too late to slide into what was once a murky, misunderstood world of strange new digital currencies.

(As an aside, I first heard about Bitcoin from a friend of a friend on a tram in Melbourne around 2013. That was early.)

The markets have grown exponentially since Bitcoin’s inception.

Today, the Australian government, like many others around the world, has a greater grasp on the cryptocurrency markets and blockchain technology than ever.

As you’ll see in this guide to crypto tax in 2022, as the technology and markets for digital currencies and assets grows and becomes more complex, so do the tax laws surrounding them.

Now, more than ever, Australians investing in (or trading) the cryptocurrency markets need to prepare themselves to accurately track, report and declare their activity.

As the ATO states:

‘Everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.’

This guide covers basic concepts around how the government in Australia treats digital currency for tax purposes, capital gains and taxable income, tax deductions and even tax-free digital asset transactions.

Plus, we’ll introduce some useful services and tools which may be helpful in tracking and reporting all the information the ATO requires when lodging crypto information at tax time.

Please bear in mind this article is neither tax nor financial advice. It is general information collated from credible sources, including the ATO.

Bitcoin and other virtual currencies are taxed as property in Australia
Bitcoin, like other digital currencies, is subject to tax in Australia.

The ATO Knows About Your Cryptocurrency

As the crypto markets and the platforms people use to navigate them have grown in recent years, there’s been an increasing emphasis on ‘know your customer’, or KYC practices.

KYC is a way both for governments to impose regulation on crypto providers, and a way for crypto providers to communicate legitimacy — and distance themselves from the criminal activity which continues to plague the fast-evolving crypto space.

In Australia, this means you can’t register for a crypto exchange or wallet without providing documents and details that prove your identity (like your driver’s license or passport) and address.

The crypto providers, in turn, must provide details on their customers to the ATO, which began collecting details in 2019 to ensure Australians active in the crypto markets were complying with tax laws.

So if someone doesn’t declare their crypto activity, that doesn’t mean the Australian government won’t know about it. And, when someone does report it, the ATO can match what’s reported with what they have on file as a result of their data matching program protocol (the current version of which runs until 2023).

In other words, it’s probably not going to work out well for those who attempt to dodge declaring their crypto activity or paying tax on it — see here for more.

The ATO Can Legally Tax Australian Residents’ Crypto Activity

Australian tax law and the ATO have caught up to the crypto markets significantly in the past few years. As we mentioned, the wild west days are over. While Bitcoin survives, it’s now one of thousands of digital currencies.

Today, those investing in and trading ‘virtual currency’ need to accept taxation as a given, just as they would with traditional stocks and other assets.

As the crypto space continues to expand in bold new directions (while initial coin offerings were once crypto’s hottest topic, NFTs are the latest booming multi-billion dollar acronym), the tax regulation surrounding it grows ever more complicated.

Below, you’ll find introductions to many different tax scenarios surrounding various areas of the crypto markets (like DeFi and staking).

The basic premise though, is this: The ATO does not treat virtual currencies like currency at all. It’s not ‘money’ for tax purposes. They treat digital assets as property.

For the purposes of applying capital gains tax, or CGT, the ATO treats crypto like any other investment asset (like shares or property). In other cases, it will treat crypto as taxable income.

The ATO makes a distinction between two types of crypto activity.

Bitcoin network
The ATO can tax trading, staking, and other blockchain activities.

The Difference Between Investing In & Trading Cryptocurrency

As in the traditional investment markets, there’s a distinction between investing and trading in crypto, too. Some people buy some Bitcoin or Ethereum in the hope they’ll someday realize a huge profit.

Others will buy and sell frequently, perhaps even as their full-time job.

With crypto, the ATO makes this distinction between investors and traders.

How a person classifies their crypto activity has a significant impact on how they’ll be taxed on it in Australia.

You’re A Crypto Investor, If…

You are an individual buying crypto for the purpose of generating a future return. This means you buy and sell digital currencies as you would shares in a company, with the same goal — profiting from long-term capital gains as those assets rise in price.

Generally speaking, most Australians in the crypto space would be classed as investors by the ATO.

You’re A Crypto Trader, If…

You use crypto activity to make an income from a business. This includes short-term buying and selling, mining crypto, and operating an exchange, for example. Whatever proceeds you generate from your crypto business activities, the ATO treats as taxable income.

Obviously, given the ATO’s oversight on crypto activity in general, both of these use cases demand detailed record keeping, regardless of how seriously or casually one is active in the market.

The big difference from a tax perspective is that while investors can qualify for capital gains tax discounts (resulting from holding an investment longer than 12 months), traders cannot, since their crypto profits are classed as taxable income, not capital gains.

For the purposes of this explainer post, we’ll focus on crypto investing, not trading.

Which Crypto Activity Does The ATO Tax?

In short, everything. The ATO classifies four main CGT events for crypto activity.

You’ll be taxed when you:

  1. Sell cryptocurrency (or gift it to someone).
  2. Exchange one crypto for another.
  3. Convert crypto to fiat currency like AUD.
  4. Pay for good or services in crypto.

These are just the main taxable events the ATO looks at. We’ll get to the more complex scenarios shortly.

First, it’s worth noting that the ATO doesn’t consider a digital crypto wallet as an asset. Rather, it treats the individual crypto assets within a wallet as separate CGT asset (the same way that an investment portfolio is not taxable — the investments within it are).

cryptocurrency market cap
There are some similarities between cryptocurrency taxation and traditional investment taxation.

Paying Tax On Crypto Capital Gains

Australians pay capital gains tax on their crypto investments at the same tax rate they pay on their personal income for the financial year.

So, for example, if someone earns $100,000 from their employment and makes a $20,000 profit from selling some Bitcoin and Ethereum, they’d held for less than 12 months, their capital gains tax rate would be 32.5%.

This means they would be taxed $6,500 on the capital gains they realized by selling their crypto.

It’s important to note that capital gains tax rates differ for individuals, companies and self-managed superannuation funds in Australia.

Australian tax rates
Australian tax rates

More on individual income tax rates here.

Capital Gains On Crypto Held More Than 12 Months

Australian tax law makes a distinction between long term and short term capital gains. This effectively incentivizes investors to hold investments for more than a year.

In the example above the investor has held their Bitcoin and Ethereum for fewer than 12 months before selling and realizing their capital gain.

This means they pay the same tax on their crypto gains as they do their personal income (for tax purposes, capital gains profits are added to other income to determine the tax rate).

But if they held the Bitcoin and Ethereum for more than 12 months, they’d qualify for a 50% CGT discount.

So, instead of paying $6,500 of their $20,000 capital gain, they’d only need to pay $3,250 — substantially less money.

Learn more about capital gains tax obligations in Australia here (ATO) and here (NAB).

Declaring Capital Losses On Crypto

Of course, people don’t always sell cryptocurrency for a capital gain. If someone bought 100 Solana at $100, got excited when it rose to $150, but then panicked when the coin dipped back to, say, $70, they might choose to sell to stop any potential further losses.

In that case, they’d be selling for $7,000 a crypto investment they paid $10,000 for in the first place — realizing a $3,000 capital loss.

Firstly, they don’t need to pay any tax on the $7,000 they received from selling the asset, since it represents a loss. Secondly, they can deduct that $3,000 loss from any other capital gains they might declare in the same — or a future — financial year.

Going back to the previous example, assuming someone needed to pay a $6,500 capital gains tax on their crypto profits, but had in the previous year realized a $3,000 loss, they could apply that loss in their current tax return, bringing the total payable CGT on their crypto down to $3,500.

Declaring a capital loss on crypto can allow an investor to offset gains they may have realized not just on other crypto, but on shares or property. They cannot, however, carry them over as a deduction on regular income.

Crypto-to-crypto trades are generally considered CGT events in Australia.

Paying Tax On Crypto-To-Crypto Transactions

The ATO doesn’t just view selling crypto for fiat currency (like AUD) as a CGT event. It also requires Australian investors report any crypto-to-crypto transactions for capital gains tax.

Remember, for tax purposes in Australia, every asset within a digital wallet is considered a separate CGT asset. So when people trade between different assets within a wallet or on an exchange, they need to track and record this like any other investment CGT event.

Since crypto is effectively property as far as the ATO is concerned, its value is based on a given currency’s market value at a given time.

Here’s an example to illustrate crypto-to-crypto tax in action:

Crypto-Crypto CGT Example

An investor trades some ETH for some SOL.

Say they bought $2,000 worth of ETH. Over three years, their $2,000 investment rises to $6,000.

Then, they trade it for $6,000 worth of SOL. By doing so, they realize a capital gain of $4,000, because they’re effectively ‘selling’ out of their ETH investment. It’s just that they’re realizing their gain in SOL, as opposed to AUD.

So while they don’t convert any crypto back into AUD, they still need to declare this trade as a CGT event when they file their tax return.

Similarly, had their ETH investment fallen by 50% to $1,000, and they’d traded that for SOL, they’d be able to declare a capital loss of $1,000.

Transferring crypto between different digital wallets is not a taxable event in Australia, since people don’t realize a capital gain by doing so.

australian residents must pay tax on crypto staking income
Staking = taxable income

Crypto Staking Rewards = Taxable Income

Crypto ‘staking’ is a blockchain mechanism whereby holders of particular cryptocurrencies can contribute to the coin’s blockchain by making their coins available to help validate transactions.

If that’s too complex, don’t worry. The simpler way to think of crypto staking is like a savings account that pays interest.

When you stake crypto, you earn more of that crypto back as a percentage of the amount you choose to stake on its blockchain.

For example, say I have 100 SOL worth $10,000 ($100 each) and I choose to stake it at a rate of 7% per annum. Nine months later, I ‘unstake’ my SOL and receive an extra 5.25 SOL in staking rewards.

Let’s say in the nine months I staked my SOL, the value rose 50%.

So when I receive my new 5.25 SOL, they’re worth $787.50 — the market value at the time I receive them.

How To Treat Staking Rewards For Tax Purposes

Unlike the other transactions we’ve looked at so far in this post, the ATO considers staking rewards as ordinary taxable income.

This is different from a capital gain. In this case, the $787.50 gets added to my regular income (like my salary, for example) and taxed at the appropriate personal tax rate.

In other words, it’s taxed like interest I might earn from keeping money in a savings account.

But, were I to sell the extra SOL I earned by staking my initial investment, I would have to pay capital gains tax on that — although the base price would be the market value at the time I received it, not the price I paid for the initial investment.

Crypto Tax On Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, is one area of crypto where Australian tax policy is seemingly still playing catchup.

DeFi is, in basic terms, is the finance marketplace on the blockchain. As the name suggests, this is finance without centralization — or intermediaries like banks, finance brokers or credit card companies.

DeFi protocols allows people to lend and borrow capital through blockchain-based peer-to-peer financial networks.

While you could argue DeFi is still in its infancy, reports suggest there is already nearly $1 trillion ‘locked’ into DeFi protocols such as Aave (AAVE), Solana (SOL) and Uniswap (UNI).

At this stage, while the ATO doesn’t have any specific guidance as yet, this doesn’t mean that DeFi activity can’t be taxed.

If someone uses a DeFi protocol to earn crypto, chances are the ATO would consider this taxable income. And like crypto staking, if they sold or traded any crypto earned through DeFi, this would trigger a CGT event.

This excellent guide details the possible tax implications of various DeFi actions.

crypto tax breaks for australian residents
Crypto investors are entitled to certain tax breaks in Australia.

Tax Breaks For Australian Crypto Investors

It’s not all tax obligations when it comes to crypto activity for Australian investors.

As with traditional investments, there are three main ways the ATO offers tax relief.

The first is the standard personal income tax break on the first $18,200 of personal income. While it’s probably unlikely someone in the crypto markets would make less than that in a financial year, it is, technically possible to pay no tax on crypto gains in this respect.

Second, the 50% capital gains tax discount is not to be underestimated. If someone realized $100,000 in gains on crypto they held less than 12 months, and that gain is taxed at the highest rate (45%), they’ll net just $55,000.

But, if they tactically hodl longer than 12 months before realizing the gain, that $45,000 tax bill comes down to $22,500 — meaning they keep $77,500. This is a significant financial difference when you consider that the difference between ‘less than’ and ‘more than’ 12 months is a single day.

The third way Australians can qualify for a crypto tax break is through personal use. The window for claiming crypto activity as personal use is quite small. Basically, if someone buys up to $10,000 worth of crypto and then immediately buys something else with it, they can claim personal use (as opposed to investing for a future gain).

As with everything when it comes to crypto tax, it’s always important to closely track and record every transaction. The burden of proof is on investors to produce the records required to prove what they claim in their tax return.

Tax-Free Crypto Transactions? They Exist!

Not only are there tax breaks available to those investing in crypto in Australia — there’s even a list of crypto transactions that trigger no tax events.

These are, of course, transactions in which the person probably won’t make a significant profit.

Australian investors won’t pay crypto tax when they:

  • Buy cryptocurrency
  • Receive cryptocurrency as a gift
  • Give cryptocurrency as a charity donation
  • Hold cryptocurrency (even if it goes up 10,000%)
  • Receive cryptocurrency from ‘hobby’ mining
  • Move cryptocurrency between digital wallets
  • Buy goods and services up to the value of $10,000 using cryptocurrency (see the personal use scenario above)

Where To Find Tools & More Information About Crypto Tax In Australia

It might seem difficult to understand the nuances of crypto tax law in Australia. But the reality is that for the average crypto investor —someone who buys and sells crypto with the objective of making some money — it should be pretty straightforward.

By and large, you could apply the same tax rules to your crypto portfolio as you would for investments in stocks.

If you sell an investment for a capital gain, you’ll need to pay a capital gains tax.

If you make money from an investment, you’ll need to declare it as income and pay tax at the marginal rate applied to your total income for the financial year.

But, as you’ve seen in this post, things can quickly grow more complex the deeper you get into the crypto markets.

Here at Navexa we’re proponents of continuously searching for and acquiring financial literacy.

Here are some resources we consulted in putting this guide together that may help you with your own crypto investing and tax reporting:

Where To Learn More About Cryptocurrency Tax

As always, seek professional advice and support when considering investing and its tax implications!

Navexa portfolio tracker
Navexa helps speed up the crypto tax reporting process

If you’re investing in cryptocurrencies and you’d prefer a quick, automated way of not only tracking your portfolio performance and returns, but also of generating comprehensive, accurate tax reports, try Navexa.

We’ve developed Navexa to give investors radical insight into how their portfolio performs over time.

Not only does the platform break down your total return by capital gains and dividend income, it calculates the impact of trading fees on your portfolio performance.

As you may already know, trading fees can have a massive impact on crypto transactions. The Ethereum blockchain has been notorious in recent years for slapping users with transaction fees which often outweigh the value of the coins being transacted.

If you don’t consistently and accurately track the impact of fees on your crypto investments, you may end up with a distorted picture of how they’re performing.

Proper tracking is also a requirement if you find you need to provide detailed information to the ATO regarding your tax return. As we outlined above, you need to be able to show the fine details of transactions to substantiate capital gains, losses and income that you’re claiming in a tax return.

While you can pull this information together using data from exchanges and wallets, Navexa allows you to consolidate your crypto portfolio data even if you trade across multiple platforms.

Remember the 50% capital gains discount the ATO offers on crypto investments held longer than 12 months? If you’re filing a tax return containing 100 trades off various sizes across 100 different dates within the financial year, calculating which qualify for the CGT discount could quickly become a headache.

With Navexa’s tax reporting tools, this calculation is completely automated — your account gives you a detailed breakdown of which holdings qualify and which do not in a single click (so long as all your portfolio data is accurate and up to date!).

We’ve built (and are constantly) developing Navexa’s analytics and reporting tools to empower investors in stocks and crypto to get powerful insights into their portfolio performance and make calculating and reporting tax details fast and easy.

Try Navexa free for 14-days and see for yourself how much faster reporting on your crypto tax can be!

Categories
Financial Literacy Investing Tax & Compliance

Investment Tax Basics: Capital Gains, Dividend Income & Tax Implications

If you invest in Australia, the Australian Taxation Office requires you pay tax on both capital gains and dividend income. Here are some basic things to know about paying tax on your investments in Australia.

Paying a portion of our income to our government has long been a fact of life — the phrase ‘certain as death and taxes’ stretches back more than 300 years.

In Australia as elsewhere, this goes for income we earn from employment, a rental property, and other sources. It also applies to investment income.

Below, you’ll find information (general, of course, and not in any way to be considered financial or taxation advice!) about:

  • The Australian tax year and cycle.
  • Capital gains tax (CGT) events for investments (long and short term).
  • Taxable investment income from dividends.
  • Different ways you can report on your investments for tax purposes.
  • Tax benefits from ‘franked’ dividends.

Let’s start by explaining the Australian tax cycle.

Tax Time: Key Australian Dates

These are the key dates to keep in mind for calculating your portfolio tax and filing your tax return in Australia.

The income year for tax purposes — otherwise known as the ‘financial year’ — goes from July 1 to June 30.

This is the period for which you’ll need to collect and collate your financial information for assessment during the period known as ‘tax season’.

Australian Tax Season

Tax season runs from the start of the next financial year (July 1) to October 31 — a period of four months.

If you’re lodging your own tax return, you have until October 31 to do so. If you use a registered tax agent, you have a little longer — usually May 15 the following year.

Check with your accountant or the Australian Taxation Office (ATO) to ensure the key dates for your specific situation.

If you’re an investor, you’ll need to report on your portfolio’s activities during the relevant financial year. Here are the main things you’ll need to consider as an individual.

Capital Gains Tax On Investments In Australia

Australian tax law specifies that you must pay tax on any assets you own when you sell them, or when another ‘CGT event’ happens to them.

At its most basic, this refers to selling shares. But it covers many other events, too, including switching shares in a managed fund between funds and owning shares in a company which another company takes over (or merges with).

What Is The Capital Gains Tax Rate?

Australians pay CGT on their investments at the same marginal tax rate they pay on their personal income for the financial year.

So, for example, if someone earned $100,000 from their employment and also made $20,000 from selling shares they’d held for more than 12 months, their marginal tax rate would be 32.5% — meaning they would need to pay $6,500 in tax on the capital gains from their investments.

The CGT rate differs for individuals, companies and self-managed superannuation funds.

If someone sell some shares for a capital loss, this may result in tax benefits, since they can deduct that loss from any gains they may have realized on other assets. If they didn’t make any capital gains (only losses) in a given financial year, they can carry a capital loss over to other financial years!

Long Term & Short Term Capital Gains

Australian tax law makes a distinction between long term and short term capital gains. This is effectively an incentive for investors to hold investments for more than a year at a time.

In the example above, where someone makes a combined $120,000 in the financial year from their employment and selling some shares, they’ve held those shares for less than 12 months.

This means they pay the same tax on their investment profits as they do their personal income (for tax purposes, capital gain profit gets added to other income to determine the marginal tax rate).

But if that person held the shares for more than 12 months, they’d qualify for a 50% CGT discount. Instead of paying $6,500 of their $20,000 capital gain, they’d only need to pay $3,250.

Learn more here.

How To Calculate Your Portfolio’s Capital Gains Tax Obligations In Seconds

Bearing in mind we’re only talking about the capital gain side of portfolio tax, it’s easy to understand why so many of us don’t exactly look forward to tax time.

Navexa’s tax reporting tools are powerful ways to remove the need for someone to have to manually calculate — or pay someone to manually calculate — their portfolio tax obligations.

Navexa’s CGT Reporting Tool

Navexa’s Capital Gains Tax Tool

What you see above is Navexa’s CGT Report.

Once you track your investment portfolio in a Navexa account, you can access a suite of analytics about everything from individual holding performance through to portfolio contributions, and of course tax analysis.

Provided the portfolio data in your account is correct and up to date, you can run an automated tax report in literally a few seconds.

The CGT Report Breakdown

As you can see in the sample image above, Navexa calculates your taxable capital gain and displays a detailed breakdown.

Under ‘Non Discountable Capital Gains’ you have: 

  • Short Term Gains: The capital gains you’ve made on assets sold within 12 months of buying them.
  • Capital losses available to offset: Any capital loss you’ve realized by selling assets for less than you paid for them.

Under ‘Discountable Capital Gains’ you have:

  • Long Term gains: The capital gains you’ve made on assets sold after holding them for 12 months or more.
  • Capital losses available to offset: Any losses realized from assets you’ve sold after holding longer than 12 months.

Then you have your CGT Concession Amount and, finally, your total Capital Gain for the portfolio (for the financial year and tax settings you’ve selected).  

It’s important to note that Navexa doesn’t provide tax advice. But as long as your account information is accurate and up to date, this should be all you need to file your return.

At the top right of the report, you’ll find buttons for exporting the report as both an XLS and PDF file.

So now you understand the basics of capital gains tax for investments.

Let’s dive into the income side of the portfolio tax equation.

Intelligent Portfolio Performance Tracking

Track Australian & US trades, cryptos, cash accounts, currency gain, dividend income and more with the Navexa Portfolio Tracker.

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Investment Income Tax

Capital gains isn’t the only form of investment income people pay tax on in Australia. Just like income from a rental property, dividends count, too. You must declare investment income.

Dividends, of course, are payments made to shareholders as a percentage of an investment’s profits. These profits have generally already been subjected to Australian company tax. Thus, the ATO doesn’t tax shareholders again on the already taxed profits when they’re distributed as dividends.

Franking Credits

This is where ‘franking’ credits come in. If a dividend is ‘fully franked’, it means the ATO judges it has already been taxed appropriately.

Depending on where an investor’s personal tax rate falls relative to the rate at which their dividends have been taxed (and had the appropriate franking credits distributed with them), they’ll either pay less than their personal tax rate (a tax offset) or, in some cases, a tax refund.

This is a great guide on dividend franking.

How Australian Tax Law Treats Dividend Reinvestment Policies

Some companies allow investors to receive dividends in the form of new shares instead of cash. This is known as a dividend reinvestment policy.

For tax purposes in Australia, the ATO treats dividend reinvestment the same as cash dividend.

If someone receives new shares instead of a cash dividend, they need to pay tax on them as though they did receive cash.

Like a cash payout, reinvested dividends may be partially or fully franked, since they still represent investors receiving a portion of profits.

How To Calculate Your Taxable Investment Income Obligations In Seconds

Navexa doesn’t just allow you to skip the hassle of working out your portfolio’s capital gain for a financial year.

It also lets individuals drastically accelerate the process for determining their taxable investment income, too. Take a look:

Navexa’s Taxable Income Reporting Tool

Navexa’s Taxable Income tool

When you automate your portfolio tracking in Navexa, the taxable investment income tool gives you everything you need to know when preparing your tax return.

You can see unfranked and franked amounts of investment income across your portfolio and the actual franking credit amount.

In the ‘Supplementary’ section, you’ll see six other fields:

The Taxable Income Report Breakdown

  • Share of net income from trusts, less capital gains, foreign income and franked distributions
  •  Franked distributions from trusts
  • Share of franking credits from franked dividends

And in the ‘Income from foreign sources and assets section’:

  • Assessable foreign source income
  • Other net foreign source income
  • Foreign income tax offset

Below the return fields you’ll see a holding by holding breakdown of your taxable investment income, like this:

This shows you subtotals for payments from each holding, and grand totals for each column at the bottom.

At the top right of the report, you’ll find buttons for exporting the report as both an XLS and PDF file.

This is the automated way to fast-track preparing to declare investment income for assessment.

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Simplifying & Accelerating Investment Tax Reporting

We hope you’ve enjoyed this guide to the basics of portfolio tax in Australia.

We’ve covered the main points of tax implications for both capital gains and investment income (including franking tax offset).

There are, of course, many more scenarios and details than what we’ve had time to cover today.

As always, consult your accountant or seek other professional advice, and ensure you manage your tax obligations and tax return responsibly.

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Navexa empowers investors to build brighter financial futures with simple, but powerful, automated investment analytics and reporting tools.

The CGT and Taxable Income reporting tools we’ve detailed here are just two of the tools at your disposal when you automate your portfolio tracking with Navexa.

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Financial Literacy Investing

Thinking Long Term: Investing Your Way To Financial Freedom

Powerful ideas on building life-changing wealth — from passive income investment strategies to staying calm through stock market crashes and financial crises.

How much do you think a person needs to invest to make a million dollars?

$100,000? $250,000?

Try $1,525.

If you invested $1,525 today in a fund that tracked the Australian stock market’s growth over the next 20 years — and you committed to investing that much every month — your portfolio would grow to just over $1 million.

(That’s based on the Australian market’s annualized performance over the 20 years to December 2017.)

While past performance is never any guarantee of future returns — and this post most definitely does not qualify as financial advice — going by that historical return, a meagre $352 a week is all it would have taken to build a million-dollar portfolio in those 20 years.

When you consider that putting that much into a savings account would have yielded not even half that over the past 20 years, it’s clear why some of us are prepared to accept more risk when we’re considering which long term investments we want to put our money in.

It seems simple, doesn’t it? Creating a significantly brighter future financial situation for yourself (and your family) is a matter of socking away money on a regular basis — personal circumstances permitting, of course — and letting the market work its magic.

As you’re about to see, executing a successful long term investment strategy isn’t as easy as it may seem.

You need some key ingredients: Financial education and literacy, clear investment objectives, a solid grasp of personal finance, and a specific investment timeframe or horizon, to name a few.

This post introduces some key ideas around investing for long term success and financial freedom.

Read on to discover some of the fundamental ideas and factors for those looking to build long term, life changing wealth through consistent and patient investing.

Examples Of Long Term Investment Strategies’ Epic Performance (Despite Multiple Stock Market Crashes)

Seth Andrew Klarman is a billionaire. The private investment partnership he founded in 1982 has realized a 20% compounded return for the past 40 years.

Let that sink in for a moment.

Twenty percent a year. For 40 years.

What started as a $270 million fund has grown to be worth around $270 billion.

In that time, the US stock market has, according to Wikipedia, crashed 10 times.

The 1987 Black Monday crash alone was enough to inflict serious, lasting financial damage to someone in my own family. The rest of their life they had to live with consequences of having sold in panic as investors all over the world rushed to get out.

But over Klarman’s 40 years running his investment portfolio, none of the 10 crashes have, in the long term, impeded him from racking up what most of us would agree is insane wealth.

According to him:

‘The daily blips of the market are, in fact, noise — noise that is very difficult for most investors to tune out.’

‘Klar’, by the way, is German for ‘clear’.

Whether or not Klarman’s name had any bearing on the way he viewed the markets during his four decades (so far), it’s certainly clear that ignoring the so-called ‘noise’ in favour of a long term strategy has been immensely profitable for him and his investors.

Noise: The Enemy Of Successful Long-Term Investing

When we talk about market noise, we’re talking about a lot of things.

Daily price movements, economic changes that impact the markets, like interest rate rises, and news flow are three common examples.

Even the talk of interest rate rises — amplified of course by the media — has been causing market jitters in early 2022.

Here’s a quick example of just how useless most noise is — and why smart investors like Seth Klarman ignore it, preferring instead to focus on their strategy.

https://twitter.com/BackpackerFI/status/1469366461407772675

The chart shows you the S&P500 index between 2009 and mid 2017. As you can see, annotated along the line is every time the financial media claimed ‘the easy money has been made’.

In other words, nine times they claimed the good times were over for the S&P500…

That things were about to get tough for investors…

That you should perhaps be scared about what was about to happen to the stock market.

And yet, while in the short term the S&P500 did indeed fluctuate — sometimes severely and abruptly — over the seven-and-a-half years this chart shows, it still doubled in value.

We can’t know how many people were scared into selling their stocks each time they read a ‘the easy money…’ headline. But, you can bet there were quite a few.

I know people who won’t even get into the stock market on account of the fact values can fall, let alone stay in stocks they own through volatile or uncertain times. Such is their appetite for investment risk (zero).

Getting back to Seth Klarman’s point…

Successful Long Term Investing Demands That You Can Stomach Volatility, Noise & Risk

‘Get rich quick’ has become virtually synonymous with ‘scam’. You read those words and you know there has to be a catch.

While it’s true that some investors do bag huge gains from speculative investments like penny stocks, it’s very rare that they’re able to repeat those successes by applying any sort of discipline or formula.

Getting rich quick, we could say, depends on luck. You have to be in the right investment at precisely the right time and you have to sell it before it plummets back down to earth (as many do).

Getting rich slowly, on the other hand — building financial freedom and exponential wealth by investing like the Seth Klarmans and Warren Buffets of this world — depends on something else.

Building financial freedom through investing depends on discipline.

As you’re about to see in this post, you have to cultivate discipline around your saving, spending and investing habits. You have to be honest with yourself about your goals. You have to understand how much risk, volatility and stress you’re prepared to tolerate. You have to start thinking in decades, not years — and certainly not months or weeks.

In other words, you have to find or create a long term investing strategy that you feel comfortable and confident is going to result in the financial freedom you seek.

And, of course, you have to get wise to short-term market noise like attention-grabbing headlines about the easy money having already been made.

What follows are some generally-agreed upon solid ideas and approaches from both the investment industry and the financial freedom (or FIRE) community.

(Again, NOT financial advice 🙂)

Find Your Investing Mindset & Bring Order To Your Finances 🔥

If you’re yet to begin investing, or you’ve started but are still caught up in the idea of getting wealthy fast, then you need to lay the groundwork for your strategy.

A solid long term wealth building strategy can’t exist without a strong foundation of financial literacy, discipline and clarity.

This means you need to get into the weeds on every aspect of your financial life.

You need to have a firm grasp on your whole financial position as it stands: Income, debt, expenses, savings, everything. Why? Because successful investing — no matter whether you’re aiming to make $100,000 or $100 million — depends on a few key principles.

Three Rules For Investing Long Term

Here are three tenets the FIRE community generally accepts as foundations for building wealth:

  1. Spend less than you earn.
  2. Invest the difference.
  3. Continuously look to widen the gap between what you spend and what you earn.

If you don’t fully understand your personal finances, you’re not going to be able to confidently and consistently spend less than you earn.

And consistency, as many in the investing world can attest, is crucial to successful long term investment strategies.

The Power Of Investing Consistently Over The Long Term

Take a look at this:

Source: https://www.lynalden.com/build-wealth/

This table shows you how much your portfolio would be worth 25 years from now based on different monthly investments, which you can see on the Y axis, at different annual rates of return, which you can see along the X axis.

As you can see, just $750 a month ($9,000 a year) has the power to become more than $1 million.

That works out at $173 a week. So when you see a table like this, ask yourself:

How much money are you prepared to commit to become a millionaire?

If you’re not — or if you don’t have $173 a week at your disposal — then you need to assess your goals, priorities and your financial position.

Remember, the first rule is that we should spend less than we earn and invest the difference.

The Australian stock market returned an average 9.7% between 1991 and 2021, according to Canstar.

Going by the 25-year table above, a monthly investment of $1,500 would hit $1 million at that rate.

As you can see, the most powerful factor here is time. Remember Seth Klarman’s portfolio performance and opinions regarding ignoring market noise.

And consider this:

Choose A Strategy (And Commit To It)

There’s no end to the opinions and advice out there about exactly how one should set about building long term wealth in the stock market.

Only you can determine your goals, values and risk tolerance.

Fortunately, we’re living in a time when there has never been such a plentiful and wide range of opinions and advice.

This section details three broad investing strategies commonly employed by long term investors.

First, a word of warning on getting too caught up in other people’s ideas about investing success (or any success, for that matter):

While there’s lots to learn and much to gain from following in the footsteps of great investors, it’s important your investment strategy suits you first, not someone else.

(If I had a dollar for every person who says they subscribe to ‘the Benjamin Graham method’, I wouldn’t need my own investment strategy.)

Idea #1: Buying Exchange Traded Funds

Exchange traded funds, or ETFs, have been growing in popularity in recent years — particularly among the FIRE community.

You can buy an ETF like you would any shares on the stock market. The difference is these funds are structured to track indexes, sectors and other specific market themes.

For example, I recently bought shares in an ETF that tracks the Dow Jones technology index. This means I’m exposing my capital to the progress of that entire market, as opposed to picking out a particular company to invest in.

Many long term investors and financial freedom seekers favour ETFs as they are relatively ‘low touch’ — you can buy them easily and bypass the need to conduct research into individual securities.

Think of ETFs as a door through which you can access different parts of the markets and financial system. You might choose an ETF than tracks growth stocks in Asia. Or, you could choose one that tracks a particular commodity or currency pair. Index funds, while different investment vehicle, can service a similar function, as do mutual investment funds.

Idea #2: Buying Growth Stocks & Value Stocks

While you can bypass researching individual stocks using ETFs or index funds, you might actually prefer to invest directly in particular stocks.

One thing you’ll need to understand when building and managing your investment portfolio is diversification. This is a good place to start.

If the risk tolerance, strategy and investment timeline allow for it — and if an investor can commit to doing in-depth market and company research — they may choose to invest in companies.

While there’s a lot of different types of companies trading on the stock market, from the miniscule (speculative penny stocks) to the mammoth (Tesla, for example), across all sorts of criteria and risk profiles, let me introduce you to two types you might find in a long term investment portfolio.

Pocket Rockets For Your Portfolio 🚀

Growth stocks are the jet boats of the stock market. They’re exciting, attention-grabbing companies that carry both higher promise and higher risk relative to more established, stable companies.

These stocks often tend to be technology companies, and are often smaller companies that are in the midst of capturing market share. According to Bankrate, these companies ‘generally plow all their profits back into the business’, since they’re in the process of expanding. This means they may be less likely to pay dividends to their shareholders, who rely instead on rising valuations to generate returns on their investments.

Growth stocks don’t necessarily have to be small-cap companies. Generally speaking, investors probably need to be prepared to be more active when it comes to owning a growth stock, since their value can rise and fall faster than blue chip companies. This means a ‘set and forget’ strategy which may be appropriate for ETF investing may not apply to riskier growth stocks. 

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Buffett’s Favourite Types Of Companies 🛳️

Value stocks, on the other hand, present a very different prospect for an investing strategy. If growth stocks are jet skis, value stocks are a cruise ship.

In basic terms, a value stock is a company that is trading at less than their ‘true’ value. How you determine that value isn’t an exact science. There are several methods you can use to calculate whether a company’s share price is trading at a discount on its fundamental value (one of the most common methods is the discounted cashflow calculation, which you can run in our portfolio tracker for free).

Value stocks often display high dividend yields and low price-to-earning ratios. They tend to be big companies that don’t have much room left to grow relative to their smaller, more dynamic counterparts, but which can also produce higher long-term returns (even if they may not deliver spectacular short term gains like a growth stock).

Value stocks might suit more of a low-touch, buy-and-hold type of investment strategy. For many seeking financial freedom, the prospect of lower share price volatility and a steady stream of dividend income makes value stocks a sensible inclusion in their portfolio.

It’s worth noting as well, that there are ETFs on the market that track value stocks — meaning you don’t necessarily have to approach value investing company by company.

Idea #3: Dividend Stocks & Passive Income 💵

For many on the financial freedom trail, dividends are king. Here’s why.

Source: https://www.dividendmonk.com/reinvest-dividends/

What you see here is the power of income in a long term investing strategy.

The red bars represent the annual returns over 40 years of holding a stock that rises an average 8% a year and collecting the dividend payments as cash.

The blue bars show you the same investment with reinvested dividends over the same time period.

If you held the stock and pocketed the dividend cash, after 40 years a $50,000 investment would have grown to around $1 million.

But if you reinvested those dividends — meaning you opted to receive additional shares as opposed to cash — you would end up with more than $3 million.

That’s a substantial difference. Of course, the example doesn’t account for what you could have done with the cash if you’d taken it instead of reinvesting it (more on that below).

Why Income Investing Suits Long Term Investment Strategies

Remember the three points from the start of this post:

  1. Spend less than you earn.
  2. Invest the difference.
  3. Continuously look to widen the gap between what you spend and what you earn.

You can understand why income investing is so attractive for those seeking financial freedom.

Dividend reinvestment hits all three of these action items. This is why so many investment strategies include income investments.

Once I’ve bought your shares and committed to leaving them for a long period, I don’t need to put any more of my regular income into the stock.

As the stock pays me dividends in the form of more shares, I automatically invest the difference.

And, even better, the more shares I accumulate through dividend reinvestment, the more I widen the gap between what I spend and what I earn (remember that in the example above I start with just $50,000 and end up earning nearly $3 million through capital gains and reinvested income).

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Einstein’s Theory Of Compounding Investment Returns 🔬

Income investing is popular for good reason. Especially with those looking to invest for long term wealth.

If you decide to make dividend stocks (or ETFs — remember ETFs exist for most markets and sectors, and you can find plenty of income-focused funds on the market) part of your long term investment strategy, you’ll be in good company.

Legend has it that someone once asked Albert Einstein what he thought was the eighth wonder of the world.

His response: ‘Compound interest’.

‘He who understands it’, Einstein said, ‘earns it. He who doesn’t, pays it’.

Wise words worth keeping in mind as you assemble your plan to build long term financial freedom!

Aim For ‘Infinite’ Investment Returns ♾️

If this sounds a little ‘hidden secrets of the rich’, that’s because it is.

Infinite returns are ultimately what you should aim for if you aspire to the sort of financial freedom the world’s wealthiest long term investors are able to enjoy.

The idea behind the term is that you buy an investment, which makes you money (either through capital gains, income, or both) and then you sell your initial stake at a certain point.

For example, say you buy $50,000 worth of shares in an ETF that tracks relatively stable, income-paying companies. You leave it alone for five years. Between capital gain and reinvested dividend income, your position grows to be worth $100,000. Then, you take out your initial $50,000, and leave the investment to run on profits alone.

If you consider the dividend reinvestment illustrations above, just imagine that the $50,000 you start with in the 40-year example was the result of profit from a previous investment.

The, imagine you do it again. What started as $50k profit becomes the capital for a new investment. Then that investment generates its own profit, allowing you to free up the $50k and continue ‘cycling’ through new opportunities.

This is the essence of infinite investment returns. Of course, this explanation makes it sound super straightforward. Like everything in the investing world, this strategy carries risk.

But when you adopt the long term investing mindset…

And you’ve learnt to ignore the market noise that triggers so many into FOMO buying and panic selling (I literally saw this in the course of writing this post)…

And you’ve structured your personal finances in such a way that consistently investing in the assets you want your money in for the long term without adversely impacting your day to day…

Then the prospect of infinite investment returns becomes more and more attainable the longer you stick to your plan.

If buying a lotto ticket is one extreme of the investing world, then infinite returns are the opposite extreme. They don’t happen overnight and they take time and sacrifice to create.

As Blake Templeton, of Forbes, points out, building wealth is a long term game.

‘Those dreams of hitting it big in the stock market are exciting, but they rarely come true. Instead, focus on building long-term wealth that grows consistently over time, like the super-rich. When you use their same strategies for wealth-building, you set yourself up for exponential gains that you can pass down to future generations.’ 

Takeaways: Continuously Invest In Knowledge — And Track Everything As You Go 📈

Perhaps the most important investment you’ll ever make on your journey to financial freedom through long term investing is in yourself.

(Yes, you’ve probably read versions of that a thousand times on Twitter. But it’s for a reason!)

At a high level, you have to back yourself to create the discipline, strategy and trajectory that will allow you to realize your vision of financial freedom.

Once you’re making progress though, it’s not only financial assets you need to invest in. You should also make time to build your knowledge of finance, investing, economics and useful information about the wider world (as opposed to ephemeral, short-lived ‘noise’).

That means making connections, reading books, listening to podcasts and following blogs (like this one, obviously). Like everything in life, the investment world never stays still. Change is constant and often dramatic.

Trends shift and investment strategies that work today may no longer work next year — see the ructions over the US Federal Reserve’s announcement about (finally) raising interest rates in early 2022.

Make sure you have good sources of information to keep building your financial literacy and stay informed of the deep themes and trends at play in the world and its markets.

Track & Analyze Your Portfolio Consistently

Most of all, make sure you have good sources of information about your own financial position and portfolio progress. As Peter Drucker points out:

‘What can’t be measured, can’t be improved.’

As so many people have found when they start tracking their fitness, their diet or their personal finances, you start behaving differently when you can fully grasp your long term progress.

Long term investing is no different.

Whether you’re investing $500, or $1,000, or $5,000 a month towards financial freedom decades down the line, you’re going to need to accurately track your progress.

This is what we specialise in here at Navexa — advanced investment analytics for everyday people looking to build long term wealth.

Navexa portfolio tracker
The Navexa Portfolio Tracking Platform

If noise is the enemy of long term investing, then proper portfolio tracking is one of your best defences against it.

Try tracking your investments in Navexa for free today.

Categories
Financial Literacy Financial Technology Investing

Why Your Brokerage Account Might Not Reflect Your True Portfolio Performance

True performance portfolio tracker

Your trading account is designed to help you buy and sell investments. While it shows you a bunch of metrics related to your portfolio, it might not reflect your actual returns or performance. This post explains the difference and shows you why tracking is arguably as important as trading itself.

As a dedicated portfolio performance tracking platform serving thousands of people, the team here at Navexa communicate with our community frequently.

One of the most common questions we receive from those just beginning their portfolio tracking journey with us, is this:

‘Why are the investment returns in my Navexa account different from those in my trading account?’

Many of our new members are accustomed to viewing their portfolio performance through a very different lens from the one Navexa provides.

That’s because the numbers you see when you log in to your trading account aren’t so much to do with portfolio performance as they are with nominal ‘gains’ or changes in value.

In a portfolio tracker, you’re seeing your rate of return, or growth rate, over time.

In this post, we’re going to explain the difference.

We’ll explain why, in our (biased) opinion, you won’t get a clear and complete picture of your long-term investment returns from checking your trading account alone.

We’ll explain how the figures you see differ both in their calculation and the information they reflect.

We’ll touch on the extent to which brokerage fees and commissions impact your portfolio performance — and why your trading account may not reflect that impact.

We’ll explain how an investment’s true performance differs from its gains, and share with you exactly how our portfolio tracking platform calculates that performance.

And, we’ll show you how to access our purpose-built portfolio performance tracking platform free today so you can see for yourself the difference from the numbers in your trading account.

Let’s start with the key differences between trading account numbers and those in a portfolio tracker.

Trading Accounts Are For Trading — Not Portfolio Performance Tracking

In our CommSec Review, you’ll learn my honest opinion about using Australia’s most popular trading platform.

 As a trading platform, it’s great. But, as I argue in the review:

‘Having been in the market since 2013, and done my fair share of buying and selling, all I can see are two performance metrics: Today’s Change, and Total Profit/Loss.

‘To be blunt, that’s not enough for me.

‘Why?

‘Because portfolio performance is a lot more complex than just my total profit or today’s change. 

I need to see lots more.’ 

I can see today’s change in both dollar and percentage terms, my total profit/loss, my portfolio’s current market value, and the total cost (which, as you’ll see, isn’t actually my total cost).

Below this portfolio level information, there’s a holding-by-holding breakdown. This shows me the price I bought each investment at, the last price it traded for, the day’s percentage change and so forth.

Take a look:

CommSec-Review

That’s all the information available to about how my investments are progressing. Frankly, it’s not enough to satisfy my appetite for data on my journey to creating long-term wealth through investing.

Which is why I’m in favour of using a dedicated portfolio tracker.

As I said, given that we operate one such tracker, this is obviously a biased opinion. But take a look at this screen compared with the one from my trading account:

portfolio tracker

That’s the Portfolio Performance Report in Navexa. Rather than providing just a handful of metrics about profit/loss and price changes, this screen shows four key metrics:

Total Return: In both dollar and percentage terms, the Navexa portfolio tracker shows me my portfolio’s actual, annualized return net of trading fees, income and currency gains (or losses).

Capital Gain: This shows me how much of my total return is comprised of capital gains across my investments. Again, this is annualized to reflect how long I’ve been running this portfolio (otherwise, my ‘gain’ would be the same regardless of whether it had taken me one year, or twenty, to achieve).

Dividend Return: This shows me how much of my annualized return over a given time period is down to my investments generating dividend income. In my CommSec account, for example, I can’t see my income factored into my portfolio performance.

Currency Gain: While not applicable in the example above, the reality of investing across multiple markets and currencies is that foreign exchange fluctuations impact a portfolio’s returns. A dedicated portfolio tracker, like Navexa, shows this.

You’ll also see, beneath the metrics I’ve just detailed, there’s another row showing the same numbers for IOZ, a leading ASX200 ETF.

This allows me to see at a glance how the portfolio is performing relative to the ASX200 across each of these factors. In the example, you’ll see that while the annualized return and capital gain is outperforming the benchmarked fund, it is lagging behind with respect to dividend income.

This is a valuable insight — and not one I can easily get by looking at my trading account.

In the holding list below, you can see the performance breakdown for each of the investments in the portfolio.

All the numbers you see reflect more than just the price movement of the investments. Here’s an example.

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Fees & Commissions Impact Your Performance (But May Not Be Reflected In Your Brokerage Account)

My trading account doesn’t show me how fees are impacting my performance. That’s probably because I pay my broker to execute my trades for me. But consider this:        

Let’s say I make 50 trades a year for 10 years at a cost of $20 a trade.

That’s $10,000. At the end of the 10 years, say I have 50 investments in the portfolio. When it’s time to sell out and collect the cash I’ve (hopefully) earned as the portfolio’s total value has appreciated over that time… that’s another $1,000 for all the sell trades on the 50 holdings at the end of the period.

The impact of fees? $11,000.

If the portfolio had started with $50,000, and we assume a 100% total return over the 10 years (that’s a 7.18% annualized return), the investor has, on paper, doubled their money.

Hooray! Right? Not quite. 

You can see how this plays out in terms of actual portfolio performance.

For our purposes in this post, I hope you can see that trading fees play a major part in determining your true performance. Which is why you need to be able to easily see your returns net of that impact — as opposed to hidden away, as they are in many trading accounts.

Fees Aren’t The Only Factor: A Dedicated Portfolio Tracker Helps You Measure Everything Impacting Your Performance

While my CommSec account is, in my opinion, brilliant for conducting market and investment research (their tools and resources are second to none across Australian trading platforms), it’s severely limited in showing portfolio performance details.

When you really dive into the world of long-term wealth building, there are four factors that deeply affect your real returns.

Remember, I’m not talking about gains here. I’m talking about our net performance after every factor impacting a portfolio has been accounted for.

Here are the four factors:

Time: While it might be tempting to look at your overall returns going all the way back to the first day of a portfolio’s life, this can result in us misinterpreting our performance. My favourite illustration of this? Would you rather make a 500% return over one year, or 10? There’s a huge difference, and we all know it. Leaving time out of our portfolio performance calculations is straight up wilful blindness.

Trading Fees: As we lay out in detail, trading fees can and often do have a significant impact on portfolio performance. Looking at your tasty triple digit ‘gain’ in your trading account might feel nice, but when you add up the cost of all the buying and selling it’s taken to achieve that gain, the reality is probably not quite so glorious.

I have a friend who sold some crypto recently and, thanks to my incessant nagging about true performance, accepted that, while they’d made a healthy profit, they’d handed over a huge percentage in exchange and account fees.

Income: This one’s a counterbalance to time and trading fees. If I have a $100,000 portfolio that generates $10,000 in income every year, that’s a massive factor in my overall performance and returns. While my trading account only shows me my capital gains on an investment, my portfolio tracker shows me my total return including dividend income — and breaks down how much of my return constitutes income versus capital gains.

Taxation: Now this one’s a little different. But the reality is — especially for those of us investing with a view to financial independence or early retirement — we must pay a significant percentage of our profits to the government when we sell out of investments. This is important to consider when you’re assessing what you’ll gain from buying and selling stocks. It doesn’t impact your portfolio performance per se, but it does massively impact your financial outcome as you draw down or completely exit a portfolio.

(FYI: Navexa provides automated CGT and income tax obligation reports, plus an Unrealized Capital Gain report to help you assess and forecast your portfolio’s taxes.)

Currency gain is also important, but of course not all of us invest beyond our home markets. In Australia, in fact, the majority of investors doesn’t stray beyond the ASX, although this is gradually shifting as more services arrive to facilitate offshore investing through new platforms and apps.

Another point here is that Navexa’s portfolio performance calculation is money weighted. That means it accounts for inflows and outflows of cash in your portfolio. This is because the reality for many of us isn’t as simple as making an initial investment and leaving it alone. Rather, we buy and sell as we go.

A money weighted return is different from a time weighted return, which doesn’t account for cash inflows and outflows.

Navexa portfolio tracker

How Navexa Tracks Your Portfolio’s Performance With Automated Accuracy

When I set out to build Navexa, I just wanted a tool that would save me having to combine the data in my trading account with my own manual calculations in order to work out my true portfolio performance.

I — like many of the Navexa community — am a long-term, buy-and-hold investor to whom strong, annualized returns matter more than eye-grabbing one-off gains.

I’ve been learning about money and wealth creation for a long time. Everything I’ve learned has taught me it’s far better to work with hard data than skewed or incomplete information about a portfolio.

This is why the Navexa Portfolio Tracker, today, is one of the leading portfolio tracking platforms in Australia. We calculate annualized portfolio performance that accounts for all the factors I mention above.

Once you load your portfolio into Navexa, you start seeing true performance over the long term. You can see at a glance your capital gains, currency gains, investment income — all net of your trading fees.

You can run comprehensive tax reports with a couple of clicks. You can track & analyze more than 8,000 ASX & US-listed stocks and ETFs, plus cryptos, cash accounts and unlisted investments (like property).

And, you can go even deeper, running reports like Portfolio Contributions, which shows you in chart form which of your investments are boosting (and which are dragging down) your overall performance.

Like I said, I’m biased, since I started Navexa. But I wouldn’t have had to — and thousands of satisfied members wouldn’t be tracking with us — were it not for my trading account failing to provide a full and clear picture of my portfolio performance.

Trading accounts are for trading. Navexa is for portfolio tracking. If you’re doing the former, you should, IMHO be doing the latter, too.

Happy tracking — create an account here (zero obligation & no credit card required!).

Categories
Financial Technology Investing

Fidelity Review 2022: Pros, Cons and How to Trade

Fidelity review

Fidelity is one of the largest trading platforms in the world. This Fidelity review looks at the company’s history, the types of investments it supports, different account types, trading fees, pros & cons, and more.

Welcome to our updated 2022 Fidelity review. Fidelity Investments is one of the outright largest asset managers in the world. Their extensive trading platform not only delivers much in the way of investment opportunities and research with zero commission, but also offers you a couple of powerful benefits which you might not find on other trading platforms.

Established just after World War II in Boston, Fidelity today manages about $5 trillion dollars worth of assets plus another nearly $8 trillion in customer accounts.

The firm was the first big American finance company to advertise mutual funds to everyday investors. The renowned fund manager, Peter Lynch, was their Magellan fund manager between for more than a decade and averaged a 29% average annual return — an outstanding performance which remains one of the best in the history of mutual funds.

Fidelity is a huge, multi-faceted organisation which operates not only the brokerage firm and trading platform we’re reviewing here, but also a retirement planning business, a proprietary investing business and other interests alongside its mutual funds operations. They are a giant of modern American personal finance.

Today though, we’re focusing our Fidelity review on the online investing platform. We’re going to dive into what you can expect as a Fidelity customer, the history of the company, the main reasons people invest on this platform, how to open an account and the various account types available.

Our Fidelity review also looks at the top three pros and cons of trading using Fidelity, explains their trading fees model, and explains why trading using Fidelity or any other online broker might not — despite the wealth of third party research and data on display — give you a complete picture of your portfolio performance.

Fidelity review
Fidelity is one of the original U.S. brokers.

What is Fidelity And What Does It Offer Its Customers 

Fidelity is many things. While we’re just looking at the group’s trading platform and brokerage account in this Fidelity review, it’s important to note that Fidelity is a multinational financial services corporation with many different interests.

Fidelity operates:

  • A brokerage firm
  • Several mutual funds
  • An investment advisory service
  • Retirement planning services
  • Index funds
  • A wealth management business
  • Life insurance
  • Securities execution and clearance
  • Custodial services

Fidelity has also been one of the first major brokers to move into cryptocurrency investing.

On the brokerage front, Fidelity supports nearly 30 million brokerage accounts and approximately 600,000 trades a day. This includes the Active Trader Pro platform.

Its trading clients hold about $8 trillion in their Fidelity accounts.

And with the range and quality of the tools and features with a Fidelity trading account, you’ll soon see why they’re one of the biggest in the world.

Before we get into opening an account with Fidelity or looking at the pros and cons, let’s explain some of the company’s history so you can see how it became what it is today.

The History of Fidelity

Fidelity’s history goes back nearly a century, when a lawyer and businessman named Edward Crosby Johnson II applied for his ‘Fidelity Fund’ approved by the Massachusetts Securities Director.

The Fidelity Fund was the only fund to gain approval in the state during the Great Depression. This fund became Fidelity Investments. Johnson later founded Fidelity Management & Research in 1946, right after World War II.

From there, Fidelity continued to expand and break new ground in the investment landscape.

In the 1960s, they became the first big finance company to make mutual funds investing available to everyday people. Up until then, mutual funds had only been advertised to high income, wealthy people. Fidelity sent direct mail and went door to door to bring a huge new group of investors into the market.

At the end of the 60s, Fidelity started serving customers outside the U.S. with the newly formed Fidelity International Limited. In 1982, they began offering 401(k) products. In 1984, they were one of the first to offer computerized trading.

More recently, Fidelity has continued to pioneer new areas for its business and clients. In 2018, they set up Fidelity Digital Assets so cater to institutional crypto asset custodial services and trading. In March 2021, Fidelity again made a bold move by filing for a Bitcoin ETF with the SEC.

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Why Do People Invest With Fidelity? 

When you consider that Fidelity has somewhere in the region of 30 million individual clients — about 10% of the U.S. population — you’d have to say there are a lot of reasons why people choose to invest and trade with them.

Fidelity has a huge range of products and solutions for investors and traders of nearly every size and experience level. They offer mutual funds, stocks and ETFs, options and more. Their trading platform comprises stock screening and research tools, portfolio advisory and wealth management services, and the separate Active Trader Pro — a completely customizable desktop application aimed at active day traders. They also offer the Fidelity mobile app.

Beyond that, Fidelity offers a robo advisor service. And outside of its platforms, also offers extensive mutual funds and retirement planning services.

So across its massive customer base, there are loads of different reasons why people sign up with Fidelity. In the U.S., these customers can visit 140 physical branches, which for some is an important benefit they can’t get at newer, digital-only brokerages and trading platforms.

One particular attraction, for some, is that Fidelity allows customers to elect to manage part of their portfolio, while they allow a professional manager handle the rest. This hybrid management approach offers more flexibility than other players in the market.

Of course, another major reason to trade with Fidelity is their trading fees.

Like many other major North American trading platforms, Fidelity has moved to a low, or no, transaction fee structure. For some of its offerings, the group claims to offer the lowest fees in the industry.

Many stock and ETF trades incur no transaction fee. There’s also no account service fees, late settlement fees or account minimum. Also, unlike other platforms, such as TD Ameritrade, Fidelity sweeps any unused cash in your account into a cash management account with FDIC insurance. This account charges no fees and pays interest.

How To Open An Account With Fidelity 

Opening a trading account with Fidelity is pretty straightforward, as you’d expect of any major online trading platform these days.

While they let you open an account the old fashioned way, by printing and mailing a form, you can of course create an account online.

First, you’ll need to select your account type. We’ll explain those below.

Once you’ve done this, it’s a case of standard investment service KYC (know your customer). So have your social security number, residential details and details about your employment handy.

stock and ETF
Opening a Fidelity account is relatively easy.

From there, you just need to complete a few fields with your personal information, and choose your investing and trading preferences.

Fidelity begins tailoring your experience during the registration process by asking you to make selections around your goals and interests — the articles, videos and third party research they’ll direct you to in your account will reflect your choices here, so be sure to take your time with this step.

Then, you can review the information you’ve entered, check everything is correct, go through the terms and conditions — which are all pretty standard for the industry, and which you’ll need to spend a long time on if you want to read them to the letter (full T’s & C’s here).

Once you’ve done all this, you’re good to go. All up, applying online should only take about 20 minutes. If you go old school and lodge your application by mail, you’ll need to wait a few days, possibly longer.

Additionally, if you want to register for international trading once you’ve created your account, you can expect to spend about another five minutes getting your account verified.

Once you’re up and running with your account, you can use the mobile app to trade and receive alerts while away from your desktop.

What Are The Different Investment Accounts Fidelity Offers?

As we’ve mentioned already, Fidelity is huge. As a pioneering brokerage with nearly 100 years of history, today they have a huge number of products and services on offer for a wide range of customers.

The same goes for the types of accounts you can open with them. As you’ll see, whatever your goals or life stage, chances are Fidelity has an account type for you.

Fidelity’s investment account types fall into seven categories. They are:

  • Investing and trading
  • Saving for retirement
  • Managed accounts
  • Saving for education/medical expenses
  • Charitable giving
  • Estate planning
  • Annuities
  • Life insurance

Within investing and trading, you have:

Brokerage accounts: Standard trading and brokerage.

Cash management accounts: Fidelity’s FDIC-insured cash accounts carry no transaction fee and pay a small amount of interest on your balance.

Brokerage and cash management accounts: A hybrid that combines the previous two.

Business accounts: A business level account for trading and holding cash.

Fidelity’s saving for retirement account category comprises no fewer than eight different types of account, including simple, traditional and rollover IRA, 401(k) for individuals and businesses, and more.

If you register for a managed account, Fidelity’s professional advisors and robo-advisors will handle your investment portfolio for you, in line with parameters and preferences you set as the account owner.

The education and medical expenses savings accounts include 529 accounts, custodial accounts for investing on behalf of children, health savings and an account designed to help disabled customers and their families plan and save for disability-related expenses.

Other account types include Fidelity Charitable, which lets you claim tax deductions for supporting charity, Trust and Estate accounts in which you can manage trading for these entities, life insurance coverage accounts and a selection of annuity accounts, ranging from retirement saving to immediate and deferred income accounts.

All up, Fidelity offers pretty much every kind of investing account you could imagine ever needing, from trading online virtually right away to planning years and decades into the future using insurance and income services. And don’t forget their more advanced trading offering, Active Trader Pro.

Now, let’s talk fees.

Fidelity trade and account fees are pretty reasonable.

Fidelity Trading & Account Fees: Generally Very Low, But With A Couple Of Exceptions

Like so many large brokers in this ever more competitive digital age, Fidelity has in recent years adopted a low/no fee/commission model. Mostly, anyway.

Across Fidelity’s huge range of platforms and account types, they’ve essentially set up their fee structure to offer little to no barrier to entry for those wanting to get started trading stocks.

While US stock and ETF trades are commission free, you will pay to trade international shares on the Fidelity platform.

On the mutual funds front, Fidelity offers nearly 4,000 ‘free’ mutual funds, which you can trade without paying fees or commissions. On the other hand, many of the mutual funds you can trade with them do incur a fee — up to $75 in some cases. You should also note that despite offering so many free funds (including, of course, Fidelity’s own), you may be charged a sale fee of $49.95 if you sell your shares in that fund within 60 days of buying them.

If you’re trading with leverage, or margin, it means you’re borrowing cash from your broker in order to (hopefully) multiply your potential gains.

If you’re borrowing to invest with Fidelity, you can expect to pay a relatively high interest rate on margin lending — 8.3% for a balance less than $25,000.

The more you borrow, the better that rate gets. If you borrowed more than a million dollars for a trade, for instance, you’d pay 4% interest on that balance.

Of course, with any trading account, there’s potentially a whole host of other fees you’ll need to be aware of. These are called non-trading fees. This is where Fidelity is quite generous.

You’ll pay nothing to open your account, deposit or withdraw money. And they won’t charge you a penalty fee for leaving your account inactive for any period of time, either. There are currency conversion fees if you choose to trade international stocks through the platform, however.

Here’s an in-depth, detailed breakdown of all Fidelity’s fees.

Fidelity packs a massive amount of value into its trading platform.

Fidelity Pros: Huge Variety, Low Fees, Quality Research

There’s a lot to like about a Fidelity account. While we’ve outlined the different types of account you can sign up for above, we’re just going to look at the individual investment account here as we cover a few pros and cons.

Pro #1: Access to a huge selection of stock and ETF investments, mutual funds and more

With a Fidelity account, there’s not much you can’t invest in. Across US-listed stocks, you can buy and sell free from fees and commissions. The same goes for almost 4,000 mutual funds — and, of course, Fidelity’s own mutual funds. You could, if you were happy to stick just to these investments, create a considerably diverse portfolio in your account via these fee- and commission-free investments alone.

Then, of course, there’s the rest; International stocks (Fidelity gives you access to more than 20 markets all up), bonds, options and their other mutual funds and ETFs not covered by their fee-free structure.

Pro #2: Low fees and commissions across much of the range + zero non-trading fees

As we just mentioned, it’s possible to trade on Fidelity and pay zero fees of commissions if you stick to certain products and markets. Not only that, but you won’t pay a cent for opening, closing or leaving your account unfunded or inactive. There’s no account minimum balance. Plus, cash not invested is automatically placed into a FDIC-insured account where it will accrue interest — not a huge amount, but a trading platform that pays anything on your cash account is still a win, especially if you’re holding large amounts of cash for a long period.

Pro #3: A wealth of top-quality research and education resources

Whether you’re working towards making your first ever investment, or you’ve been in the markets for decades already and are well into your investing journey, Fidelity, like its competitor TD Ameritrade, packs a mind-boggling amount of educational and research resources into your account.

If you’re looking for tools to help you analyze stocks and markets, you’ll be pleased to know Fidelity provides:

Stock, Options & Fixed Income Screeners: In your account, you’ll find a host of screening tools for stocks, funds, options, bonds and more. You can use these screeners to filter through the wide range of investments available and narrow down those you want to look closely at. One of these screeners, the Mutual Fund Evaluator, allows you to examine funds’ characteristics and compare them against each other:

funds Fidelity
Fidelity’s stock and fund research tools offer in-depth analysis of potential investments.

40 Tools & Calculators: Budgeting, strategizing, predicting the impact of a certain trade on your overall portfolio performance and balance… the list of tools and calculators available in your Fidelity account goes on, with about 40 available all up.

Research & News: There’s more research and analysis packed into a Fidelity account than you could probably ever hope to digest. They host stock and market research from about 20 top-tier sources, including Thomson Reuters. You can even sort your news sources based on your holdings and stocks you’re watching in your account.

Your account also lets you examine charts using technical patterns, historical and intraday pricing data. Active Trader Pro takes this a step further with more advanced real-time trading data. And, as with most major platforms, Fidelity offers an extensive and quality mobile app experience, too.

Takeaways:
  1. Free to trade US stocks and nearly 4,000 mutual funds
  2. You can earn interest on cash accounts
  3. Packed with research tools

Fidelity Cons: Higher Fees For Certain Services, No Futures, Options

While Fidelity offers a large amount of value across a wide range of products and platforms, there are, of course areas where some customers may find the service lacking.

For the everyday investor — someone looking to research and trade stocks and build up a long-term investment portfolio — Fidelity should deliver more than enough to help you on your way.

But if you’re a more advanced investor or trader who wants access to more complex investment products, you might find you need to look elsewhere for the technology that suits your needs.

Con #1: High Fees In Some Areas May Negate Low Ones Elsewhere

While we consider Fidelity generally a low-fee trading platform, there’s a couple of areas in which they’re not so competitive and, depending on your requirements, this may impact the extent to which the platform could be good value for you.

If you’re wanting to trade beyond Fidelity’s free mutual funds, for example, you’ll pay nearly $50 a trade. Margin interest is also relatively high, if you’re looking to borrow for trading. You’ll need to pay more than $10,000 to borrow $150,000 — which, if your leveraged trade didn’t turn out to be profitable, would negate all the low or no-fee parts of your Fidelity account.

Con #2: No Support For Commodities & Futures Options

Fidelity’s Active Trader Pro provides a powerful service for advanced traders to access the markets with real-time data and an interface they can customize to suit them. However, despite offering this trader-centric part of their service, Fidelity does not currently allow you to use it for trading either commodities or futures options — two investment vehicles commonly used by day traders.

Con #3: Need To Use Different Platforms For Research & Trading

This isn’t strictly a con, given that between the Fidelity trading platform and Active Trader Pro, you can access both large amounts of fundamental data and third-party market and investment research, and an advanced interface through which to make more complex trades.

But, these two sides to the Fidelity platform aren’t integrated. You need to use two different parts of the service to conduct research and carry out trades (this doesn’t apply if you’re happy just using the main platform for stock, ETF and mutual funds investing).

Takeaways:
  1. Some parts of the platform aren’t free/competitively priced
  2. You can’t trade commodities or futures options
  3. Active Trader Pro doesn’t provide fundamentals research
active trader pro
Fidelity’s Active Trader Pro.

Fidelity Customer Support: Comprehensive & Multi-Level

As you’d expect from a massive, long-established broker like this, Fidelity’s customer support is regarded as pretty good.

Depending on your account type, you can reach them through 24/7 live chat, the customer support hotline (800-343-3548). For the best results, try reaching them between 8am and 10pm Eastern Time, and Saturdays from 9am to 4pm.

More recently, Fidelity has upped its social media presence, which you might find useful in resolving any support requirements, too. You can check out their subreddit, YouTube channel, Twitter account and Facebook page.

Verdict: One Of The Most Powerful Brokers For U.S. Customers Of Nearly Every Experience Level

Fidelity Investments regularly tops various publications’ ‘Broker of the Year’ lists. And while there are a few potential downsides to using the platform in some cases (see above), overall this is an investment research and trading platform that delivers quality and value in spades.

Investopedia rates Fidelity 4.5 out of 5 stars, saying they ‘continued to enhance key pieces of its platform while also committing to lowering the cost of investing for investors’.

Brokerchooser awards them a 4.7 stars — ‘it offers plenty of high-quality research tools, including trading ideas, detailed fundamental data and charting. The web trading platform is easy to use, and offers advanced order types’.

Nerdwallet and Stockbrokers award a full 5 stars out of 5 stars, with the latter commenting: ‘Fidelity is a value-driven online broker offering $0 trades, industry-leading research, excellent trading tools, an easy-to-use mobile app, and comprehensive retirement services.’

You can see then — from our review and from the consensus of these leading sites — that Fidelity is a formidable platform with the history, technology, product range, fees structure and research to make it a brilliant solution for investors and traders of different levels.

They wouldn’t have nearly 10% of the US population as customers were they not a proven, reliable and top-quality broker and trading platform.

Before we wrap up this Fidelity review, though, we should mention that, if you are already, or are looking to become, a Fidelity customer, you should consider adding another piece of financial technology to your investing toolkit.

The Navexa portfolio tracker
The Navexa portfolio tracker automatically tracks stocks and crypto performance in a single account.

Don’t Cut Corners On Your Portfolio Tracking

One area in which many brokers — even a best-in-class brokerage account like Fidelity — often lack is in their portfolio tracking and analytics capabilities.

While you can load your Fidelity accounts into FullView (Fidelity’s analytics module) to see your asset allocation and portfolio performance, Investopedia reports that it ‘can be slow to load and a little difficult to customize’.

Here at Navexa, we know that correctly tracking portfolio performance is vital to building and understanding your long-term, true investment returns.

See how true performance differs from the numbers you might be seeing in your brokerage account.

Three Things You Should Know About Your Portfolio Performance

Here are three vital things you need to know in order to fully understand the value and performance of a given investment, and your wider portfolio.

1.   How much time have you invested to generate a return? Consider that a 100% gain in a year is far more desirable than a 100% gain in five years.

2.   How much income have you earned from dividend payments? One stock our founder owns has paid him back 40% of his investment in dividends. This substantially affects how you should view an investment’s performance.

3.   How much have you spent in fees? If you’ve been investing for 20 years, making, say 25 trades a year at $20 a trade, that’s $10,000. However much you spend on fees in the course of your trading, you need to factor that in to fully understand your portfolio performance.

Navexa portfolio tracker
Bring all your trading data into one place with the Navexa portfolio tracker.

How Tracking Your Portfolio With Navexa Complements Your Trading Platform Experience

Our portfolio tracking platform allows you to see not only your portfolio’s true performance after fees, income, currency gains/losses and annualization, but to drill down deep into all the factors affecting your portfolio and its holdings.

You can run a portfolio contributions report to identify which holdings are contributing the most (and least) to your portfolio performance.

You can run an upcoming dividends report to see which income you have scheduled coming from your investments (thanks to official data from the NYSE, NASDAQ and ASX).

You can view your portfolio performance across any date range you prefer, and factor in closed positions (or not) as you wish.

Try Navexa free for 14 days and see for yourself your portfolio’s true performance.

How Fidelity Customers Can Use Navexa To Optimize Their Investment Journey

Our platform is what we like to call ‘broker agnostic’. That means whether you’re trading stocks, ETFs and mutual funds, crypto or pretty much anything else, you can track it all together in Navexa.

Navexa is one of the few tools that allows investors to bring all their trading platform data into a unified analytics and tracking account where they can see their combined investment performance net of trading fees and currency gain.

I’ve personally experienced the power of tracking dividend income on a stock which made me a 100% return in dividends alone, despite not generating any capital gain. So trust me, it pays to track this stuff properly!

Not only does this allow you to see your true overall performance, but it breaks down your performance by capital gains, investment income and different methods of calculation like simple returns and compound annual growth rate.

For Fidelity customers — or those trading with any major US brokerage account — it’s super easy to get started with Navexa’s automated portfolio performance tracking.

Simply upload your historical trade data using our handy portfolio file uploader tool to see your investment performance clearly and optimize your investment journey!

Categories
Financial Technology Investing

Our TD Ameritrade Review: How To Get Started, Pros & Cons, And More

ameritrade review

Our TD Ameritrade review covers key pros and cons of trading with one of North America’s most powerful platforms, how to open an account, transaction fees, how to use the variety of research and education tools on offer, and more.

Welcome to our TD Ameritrade review. This (rather long) article dives deep into the TD Ameritrade platform to give you a clear picture of the service’s extensive history and details on:

  • The TD Ameritrade platform, service and offerings
  • How to open your own TD Ameritrade account
  • Pros and cons of using TD Ameritrade
  • How to decide whether TD Ameritrade might suit your investment needs
  • And more!

As one of the largest online brokerage platforms on the planet in its own right, TD Ameritrade was acquired in October 2020 by Charles Schwab.

This huge merger with Charles Schwab will probably take several years to complete. So, for now, we’re reviewing TD Ameritrade as a standalone platform.

If you’re investing in stocks, mutual funds, options or even Bitcoin futures contracts, TD Ameritrade has a variety of services you might find useful.

The best way to describe the trading platform is as a full-service investment services provider.

Whether you’re just starting out as an investor, or you’ve been in the markets a long time, or even if you’re running an investment fund or managing client’s portfolios, TD Ameritrade is a powerful, far-reaching trading platform that offers products and tools that will likely support you in your investing mission.

The service isn’t just focused on facilitating trading and investing. Like CommSec, TD Ameritrade has invested heavily into the education and guidance side of its service. Chatbots, seminars, articles, slideshows and other educational content and tools are packed into the platform to enable investors of all levels to learn and improve. 

TD Ameritrade even offers a virtual trading simulator so you can practice trading with a notional $100,000.

We’ll come back to these features later in our review. Plus, we’ll walk you through opening an account, using the platform, potential pros and cons of using TD Ameritrade and more.

Also, we’ll show you how using this powerful portfolio tracker alongside your TD Ameritrade (or other) trading account can enhance and enrich your understanding of your investment portfolio’s true performance.

What Is TD Ameritrade And What Do They Offer

TD Ameritrade traces its history back to 1975, when four partners opened First Omaha Securities, Inc. in Nebraska.

In 1983, that became Ameritrade Clearing, Inc. Five years later, they introduced the first telephone trade order system. In 1995, they became the first to offer electronic trading.

From there, the group acquired multiple businesses to become a digital-focused trading service. The ‘TD’ in their name comes from their 2006 merger with Toronto-Dominion Bank’s US brokerage business, TD Waterhouse.

TD Ameritrade’s tech focus continued. They are the first company to advertise on the Bitcoin blockchain. As of October, 2020, they’ve been acquired by another huge North American brokerage, Charles Schwab Corporation. Whether the Charles Schwab merger changes much about the platform remains to be seen.

TD Ameritrade offers its electronic trading platform for customers to trade stocks (common and preferred), futures, ETFs, cryptocurrency, foreign exchange, options, mutual funds, fixed income investments and even carry out margin lending.

The company has more than $1.3 trillion on its platform across about 11.5 million accounts.

On average, it supports nearly 900,000 transactions every day and generates approximately $6 billion a year.

The platform offers a large range of services and access to a many different types of investments.

There’s the TD Ameritrade platform itself and the sophisticated active trading service they acquired in 2009, thinkorswim.

Both these sides to the platform are available on web and mobile.

TD Ameritrade offers a large variety of account types.

TD Ameritrade Account Types
  • Standard accounts
  • Retirement accounts
  • Education accounts
  • Specialty accounts for trusts, partnerships and more
  • Managed portfolios
  • Margin trading

Depending on your account type, you’ll have access to a wide range of investments across the web and mobile platforms.

While you can’t directly trade cryptocurrencies (only Bitcoin futures), you can trade pretty much everything else.

What You Can Trade on TD Ameritrade

  • Stocks (long and short selling, plus over-the-counter penny stocks)
  • Mutual funds (nearly 2,000 of them)
  • Bonds (corporate, municipal, treasury, contracts for difference, plus international fixed income and even junk bonds)
  • Options
  • Futures
  • Foreign exchange
  •  Unit investment trusts

Also central to the TD Ameritrade offering is that, unlike some other ‘traditional’ brokers, they’ve recently moved to a low or no-fees model. In 2019 they reduced most of their online trade commissions to zero — meaning you can trade many assets and instruments on the platform for a low fee and pay nothing on your returns.

This brings TD Ameritrade in line with the growing low fees movement driving newer investment platforms into the market.

It also means you can access one of North America’s most powerful investment platforms more cost-effectively than ever before.

So, you’re interested in signing up? Here’s how it works. 

How To Open An Account With TD Ameritrade

Opening a TD Ameritrade account is about as simple as you’d expect with any major North American broker.

You can expect the standard know-your-customer protocol.

To create an account, you’ll need either you Social Security number or your Individual Taxpayer Identification Number.

Plus, you also need to provide your employers’ name and address.

The whole process should take a few minutes.

First, you’ll need to select your account type.

ameritrade review

The signup wizard provides questions and prompts through the process to ensure you register the right account type for you.

Once you’ve confirmed this, you’ll need to enter your personal information.

Then you’ll need to spend a little time reviewing the technical information and terms of your account. This stage includes selecting how you wish TD Ameritrade to treat your cash account — it can go into either a FDIC-insured deposit account or a SIPC-protected TD Ameritrade account.

You’ll also need to review some IRS-related questions here.

Once you’re satisfied — and they’re satisfied — with your information and selections, you’ll need to create your secure login details for your account.

Once you’ve set your password and user ID, TD Ameritrade activates your account and you’re good to go. From here you can fund your account and start trading. You’ll see your official TD Ameritrade account number once you’ve completed the process.

There’s no minimum amount you need to fund your account with to begin. Though if you’re looking to trade options or do margin trading, they require you to fund your account with at least $2,000.

Pros And Cons Of Using TD Ameritrade 

The TD Ameritrade offers an extensive platform that is powerful and — aside from a 2007 hack, in which customers’ details were compromised and circulated on the dark web for several years — largely secure.

TD Ameritrade offers a range of security products, procedures and an asset protection guarantee to protect you from your trading account or personal information being compromised.

As such large trading platform, there are plenty of pros and cons to be debated.

We’ll look at three of each.

TD Ameritrade Pros

Huge array of trading tools and investment options: From the website and mobile versions of both the TD Ameritrade trading platform and its sister active trading platform, thinkorswim, to the number of different things you can invest your money into (from stocks to options and even junk bonds, plus the huge range of mutual funds), the platform gives you a high level of access to the markets. Plus, you have the TD Ameritrade mobile app, and other associated mobile tools.

First-class research and education resources: TD Ameritrade offers you plenty of knowledge in the form of reports, presentations and even an portfolio simulator so that you can progress from beginner to novice, or novice to advanced.

Low fees, high standards: Being one of the more established ‘traditional’ brokers in North America hasn’t stopped TD Ameritrade offering progressive pricing. While you might expect zero fees and commissions from smaller, newer trading platforms like Robinhood, you’ll be pleased to know that TD Ameritrade offers no fees to open an account or trade stocks. They also offer all ETF trades and more than 4,000 mutual fund trades with zero commission.

TD Ameritrade Cons

Information overload: The flipside of TD Ameritrade’s platform being so vast and powerful is that it makes it less than simple for beginner investors or those new to the platform to navigate. With such an array of investments, account types, and a fully customizable trading dashboard packed with information, the chances of overwhelm are high. This may deter you if you’re just looking for a simple platform on which to buy a couple of ETFs.

Occasional outages: The platform had a couple of outages in late 2020, reportedly due to heavy trading volume. This issue apparently prevented users from logging in and/or making trades. This isn’t strictly a con, since even the most robust platforms can suffer occasional outages, but it’s something to be aware of.

No fractional shares, penny stock commissions: If you want to invest in Amazon, but you only want to invest $1,000, you won’t be able to do so on TD Ameritrade. While competitors like Fidelity do cater for fractional share investing, at this stage, Ameritrade does not. Another thing you’ll find is that while many of the platform’s available investments give you zero-fee and zero-commission access, over-the-counter penny stocks do incur a $6.95 commission. And since fees can be a significant factor in your true portfolio performance, it’s important to know this if you’re looking for a trading platform that allows you access to the small and micro-cap end of the stock market.

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The Best Way To Use TD Ameritrade For Your Needs 

There’s so many different investment vehicles, account types and tools packed into the TD Ameritrade platform that we’d be here all day if we listed every way you could use it for your needs.

Let’s look the basics of making a trade.

Making a trade

Once you’ve set up your account and moved some funds into it for trading, you’re ready to get started.

You can see from the screenshot below how much information is on the trading account homepage alone.

ameritrade review

To make a new trade, hit the ‘Trade’ button along the top navigation bar.

This will bring up a new screen in which you can select between stocks and ETFs, options and more.

From here it’s a pretty self-explanatory process, similar to most other trading platforms.

Here’s an example of the options trading screen.

ameritrade review

In this example, you look up the ticker symbol and set the various fields to your preference for the trade. Then, click review order. You can also opt to save the trade details for later, which is useful if you want to go away to do some further research before locking it in.

Also near the bottom of the screen you’ll find the SnapTicket. This is TD Ameritrade’s tool for getting quotes and actioning trades. You can open a SnapTicket and it will display no matter where on the platform you navigate.

Using TD Ameritrade for Research

As well as being a powerful tool for buying and selling a multitude of investments, the platform gives you an equally impressive range of research tools and resources.

TD Ameritrade’s stock screeners are completely customizable. If you don’t want to customize, you can choose from nearly 100 preset options. You can also access screening tools for ETFs, options, mutual funds and fixed income.

Plus, through both the TD Ameritrade portal and the sister thinkorswim trading platform, you can access a huge amount of calculators, news, charting tools, trading ideas and third-party research from some of the most respected firms in the world.

ameritrade review

While there may be a risk of information overload thanks to the sheer volume of data and tools at your disposal, if you know what you’re looking for and you know which information will suit your research best, chances are you’ll find it in the TD Ameritrade platform.

Using TD Ameritrade For Analyzing And Tracking Your Portfolio

If you’re familiar with the importance of asset allocation, you’ll know that buying and selling investments is just a part of a much bigger picture.

Being able to zoom back from stock-by-stock analysis and performance, and focus on your overall, long-term portfolio performance is key to a solid investment strategy.

The platform’s Portfolio Planner tool shows you your asset allocation and allows you to compare that to a target allocation for a theoretical portfolio.

If you have a particular pre-defined asset allocation or portfolio management strategy you’re seeking to follow, you’ll be able to add this into your Portfolio Planner and get specific recommendations on which stocks may be a good fit.

This is a valuable tool — one that goes beyond just facilitating trades and allows you to pair your research and investing with a broader, longer-term strategy.

There’s so much packed into TD Ameritrade and thinkorswim (which deserves its own independent review) that we can’t cover everything here.

Your needs for a trading platform will be unique to your individual goals and risk tolerance. But based on the scale and depth of TD Ameritrade’s platform, its likely you’ll be able to find the right combination of assets, research and tools to fit your investing strategy.

Should You Consider Opening An Account With TD Ameritrade?

According to StockBrokers.com, TD Ameritrade is not only the best overall stock broker in U.S., they also rank first for active trading, tools and platforms, and education.

The platform itself makes the bold claim that by joining, you’ll grow smarter with every trade you make. And going by the amount of account types, investing options, and tools for research and education, you’d have to say that TD Ameritrade is in a strong position to make that claim — provided, of course, you understand how to use these tools and interpret the data and analysis these resources generate.

According to this TD Ameritrade customer:

‘If I started from scratch and had to find a new broker today, these would be the key requirements I’d look for:

  • No Minimum Deposit Requirement
  • Low Transaction Costs
  • Commission Free ETFs
  • Great Research Tools
  • Easy to Use Trading Platform
  • Great Customer Support
  • Easy Tax Reporting’

TD Ameritrade, of course, boasts all these. As the customer points out, the quality and depth of the research tools especially would justify paying more in trading fees and commissions than you might with a competitor platform.

But since 2010, TD Ameritrade has — unlike some of the other big, established trading platforms in the North American market — been aggressively generous in its offer of low or no fees and commissions. This is particularly true of their extensive ETF offering.

So on this basis alone, you should consider signing up with the platform since there’s enough tools and resources to support you whether you’re a beginner investor looking to learn about the markets, an advanced trader who’s seasoned at using stocks, bonds, options and leverage, or pretty much anything in between.

But as we’ve touched on in this TD Ameritrade review, the platform and the organisation behind it has either pioneered — or acquired — so many different services for the modern investor that no review is going to be able to cover everything.

But one thing worth mentioning here is TD Ameritrade’s customer support.

According to the customer we quoted before:

‘Help is easy to come by with phone, email, online chat, in person at a local branch, and the easy to use Ask Ted feature… the educational tools available, and the little help center buttons in all the right places… will walk you through the basics.

On top of that, I get a couple of phone calls every year from the local TD Ameritrade branch. They just check in, see if I have any questions, concerns, and how they can help.’

In other words, if you have any issues with any aspect of your TD Ameritrade account, there’s multiple ways you can access support and assistance.

Of course, only you can decide whether signing up is right for your specific requirements.

But, in short, you should consider signing up to TD Ameritrade if:

  • You want access to a huge variety of investment vehicles, from regular stocks through to options and margin lending.
  • You value in-depth research and educational resources to help improve your financial literacy and skill as an investor.
  • You want the support of trading with one of the biggest (and soon, thanks to the Charles Schwab acquisition, the biggest) trading platforms in North America.
  • You want to minimize the impact of trading fees and broker commissions on your investment portfolio.

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How To Get Started Trading Stocks, ETFs, Mutual Funds, Options, Bonds Or Futures Through TD Ameritrade’s Online Brokerage Services

Whatever level of experience you’re at right now — be it embarking on your investing journey or looking to start making more complex trades with futures and options — TD Ameritrade has gone to great lengths to provide to resources to get you started.

If you’ve never traded a single stock before, this is a good place to start. This is TD Ameritrade’s introduction to the world of stock investing.

Here, you’ll find the basics. From the definition of a stock, introductions to common approaches to investing in stocks, a short glossary covering five key terms you should be familiar with before getting into the market (read a more extensive glossary and explanation of stock trading strategies), to a quick guide on setting up an account, this page is a good place to get started — especially if you already know you want to sign up to TD Ameritrade.

Like we’ve said, though, there’s a massive amount of resources on the platform to support investors of every level in building their financial literacy and understanding of the markets.

If you sign up, you’ll have access to TD Ameritrade’s Immersive Curriculum. This is a free online course that curates a series of courses based on your experience level and account setup choices.

Some of the courses available:

  • Simple Steps for a Retirement Portfolio
  • Stocks: Fundamental Analysis
  • Income Investing
  • Stocks: Technical Analysis
  • Trading Options
  • Options for Volatility
  • Weekly Options
  • Fundamentals of Futures Trading

This curriculum means that even if you’re not ready to start trading stocks, or options, or futures, or even to start analyzing potential investments using a particular methodology, you can still get great value from the TD Ameritrade platform.

While other brokers and trading platforms might make empty promises about supporting their customers and furthering their knowledge, the same can’t be said about TD Ameritrade. Their resources and support for investors of all levels is extensive and impressive — particular the way the above courses can be tailored to your particular requirements.

A TD Ameritrade account gives you access to three separate (but connected) platforms. There’s the main web platform for the trading account, the associated TD Ameritrade mobile trading platform, and the elite, active-trader level platform, thinkorswim, which you can see below.

ameritrade review

Thinkorswim comes with a downloadable desktop application, a web platform and a mobile app. So really you can access up to five different platforms between TD Ameritrade and thinkorswim.

Another cool feature is that the trading platform app has been optimised for the Apple Watch, meaning you can moniter watchlists, stock quotes and market data from your wrist.

ameritrade review

Based on TD Ameritrade’s large list of investment offerings — stocks and ETFS, mutual funds, bonds, options and more (most with low or no fees and zero commission to trade) — and its extensive research and education resources, this platform will probably be a good place to start your investment journey. 

In our opinion, any trading platform that invests this much in helping its customers strengthen and deepen their knowledge of investing is worth exploring.

Paired with the scope and power of a platform as expansive as TD Ameritrade, that quality becomes even more beneficial.

Trading With TD Ameritrade? Make Sure You Track Your True Portfolio Performance

This TD Ameritrade review has, we hope, shown you that it’s a platform that can offer investors of traders of nearly every level a powerful suite of tools and resources.

We especially like the asset allocation module, with its model portfolio options and associated investment recommendations.

One area in which TD Ameritrade lacks a little is in its true performance portfolio tracking capability.

You can, of course, easily see how your investments are performing.

This is what your portfolio looks like in their platform:

ameritrade review

In this example, you can see each holding’s dollar value and percentage return. You can also see the relative weighting of each in your portfolio on the coloured pie chart.

For such a sophisticated trading platform, this is a very basic level of portfolio insight.

Let us explain.

The rise of self-directed and so-called ‘democratizated’ investing — in which TD Amertrade is playing a part by offering such valuable trading tools and investment education resources with such a low barrier to entry — has more people entering the market and trying to build wealth.

But what many investors are forgetting — or or just plain aren’t aware of — is that there’s a difference between a portfolio’s gains and its true performance.

Your trading account often only shows you how much money you’ve put into your portfolio, and how much you’ve gained or lost. You can see in the screen above that there’s no data or metrics reflecting how long those holdings have been in the portfolio.

Consider this. If you had to choose from two investments which would both gain 100%, but one took half the time to do so than the other, which would you choose?

That’s a no brainer. Because when you annualize those returns, the one that took half as long to reach that gain has actually performed twice as well.

This is the problem with the nominal gains and returns you’ll see in a trading account like TD Ameritrade. 

They’re only a part of the full financial picture you need to see.

The reality is that time, income, trading fees and other factors play a significant role in determining your real returns and true portfolio performance. This is true for even the smallest, shortest term investment. And it’s especially true for long-term strategies.

Three Things You Should Know About Your Portfolio Performance

Here are three vital things you need to know in order to fully understand the value and performance of a given investment, and your wider portfolio.

1.   How much time have you invested to generate a return? Consider that a 100% gain in a year is far more desirable than a 100% gain in five years.

2.   How much income have you earned from dividend payments? One stock our founder owns has paid him back 40% of his investment in dividends. This substantially affects how you should view an investment’s performance.

3.   How much have you spent in fees? If you’ve been investing for 20 years, making, say 25 trades a year at $20 a trade, that’s $10,000. However much you spend on fees in the course of your trading, you need to factor that in to fully understand your portfolio performance.

If you’re thinking of joining TD Ameritrade, we strongly recommend you sign up with a dedicated portfolio tracking platform like Navexa, too.

Navexa portfolio tracker

We believe that in the most connected and data-rich era of financial history, there’s no excuse for not knowing the exact details of every dollar going into and out of your portfolio.

The truth is that there’s are many more things impacting your portfolio than just whether or not the investments in it have gone up or down this week or month.

This is why we developed Navexa. It’s a portfolio tracker that accounts for every factor impacting your investments — time, income, fees and more.

If you’re using a TD Ameritrade account, use a Navexa account to dive even deeper into your portfolio performance data and analyze holdings across the NYSE and NASDAQ.

You can generate a variety of reports, including upcoming dividends (great for forecasting what income your portfolio is scheduled to generate), portfolio diversification, portfolio contributions, and more.

Open a Navexa account (free).