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Unitising portfolio impossible due to timing of information?

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nmdhqbc
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Re: Unitising portfolio impossible due to timing of information?

#453101

Postby nmdhqbc » October 26th, 2021, 9:07 am

funduffer wrote:The only time you need a portfolio valuation is just before a sale, or a purchase of share with new cash from outside the portfolio.


something to ponder... if you buy the new units when you invest outside cash are you truly monitoring your investment performance? if that cash was sitting in a savings account waiting for an opportune moment to invest it surely that is an investment decision which is not being measured by your unitisation. from the day the cash becomes available to invest to the day you invest it you are excluding it from the performance measurement. for me it makes more sense to add the cash to the portfolio when it has been declared as investable as from that moment on you are making a choice of not investing it yet or investing it and that ongoing decision should be part of how you judge your portfolios performance. I just have an extra column for cash which i add interest to in the spreadsheet rather than matching it up to a specific bank account.

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Re: Unitising portfolio impossible due to timing of information?

#453102

Postby Arborbridge » October 26th, 2021, 9:10 am

funduffer wrote:
Arborbridge wrote:

As regards the original question about timing, I do not believe this is a significant difficulty - particularly with income units if the income is treated as paid away.

Arb.


Spot on, Arb.

The only time you need a portfolio valuation is just before a sale, or a purchase of share with new cash from outside the portfolio.

I personally have HYPTUSS up and running, and update the valuation just before I hit the 'trade' button in my broker's software. I then use the HYPTUSS valuation and the sale/purchase information from my broker to update my unitisation spreadsheet. The objective is to get the change in the number of units correct.

Since I only make a handful of trades each year, it is not much effort at all.

FD


I do something similar: I run HYPTUSS to get the closing prices the night before my usual trades, which are on a cheap dealing day. I don't know when the trade will take place exactly, so I standardised on the closing price in that way. If it's a live trade which I am doing myself, then I do it your way - run HYPTUSS close to the time.

Really, we are only talking about gnat's whiskers in difference and I'm after the grand sweep over months and years.

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Re: Unitising portfolio impossible due to timing of information?

#453105

Postby Arborbridge » October 26th, 2021, 9:16 am

nmdhqbc wrote:
funduffer wrote:The only time you need a portfolio valuation is just before a sale, or a purchase of share with new cash from outside the portfolio.


something to ponder... if you buy the new units when you invest outside cash are you truly monitoring your investment performance? if that cash was sitting in a savings account waiting for an opportune moment to invest it surely that is an investment decision which is not being measured by your unitisation. from the day the cash becomes available to invest to the day you invest it you are excluding it from the performance measurement. for me it makes more sense to add the cash to the portfolio when it has been declared as investable as from that moment on you are making a choice of not investing it yet or investing it and that ongoing decision should be part of how you judge your portfolios performance. I just have an extra column for cash which i add interest to in the spreadsheet rather than matching it up to a specific bank account.


Well, I might decide to invest the cash in something quite different or spend it on lollipops. Do you want to measure your chosen portfolio and compare with other instruments, or measure the financial decision making of your whole lifestyle? As regards this board, I think it is more interesting to know what the HYP is doing and in general that means running a low cash balance (the time to invest being pretty soon!).

Indeed, if either of my inc or acc unitised accounts carried too much cash, I would transfer it out to make sure I am monitoring the underlying funds, not the drag of large amounts of univested cash.

Arb.

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Re: Unitising portfolio impossible due to timing of information?

#453125

Postby seagles » October 26th, 2021, 10:16 am

nmdhqbc wrote:
funduffer wrote:The only time you need a portfolio valuation is just before a sale, or a purchase of share with new cash from outside the portfolio.


something to ponder... if you buy the new units when you invest outside cash are you truly monitoring your investment performance? if that cash was sitting in a savings account waiting for an opportune moment to invest it surely that is an investment decision which is not being measured by your unitisation. from the day the cash becomes available to invest to the day you invest it you are excluding it from the performance measurement. for me it makes more sense to add the cash to the portfolio when it has been declared as investable as from that moment on you are making a choice of not investing it yet or investing it and that ongoing decision should be part of how you judge your portfolios performance. I just have an extra column for cash which i add interest to in the spreadsheet rather than matching it up to a specific bank account.


I only take into account cash sitting in the account as I transfer out all dividends from my HYP and use that for other things, sometimes it does get added back in to buy shares but currently not. The only money that stays there are the remains of when I do purchase shares, currently £12.18. The rational is as per Arb, the money is more likely to be used for something else so why should it be accounted for in Unit calculations.

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Re: Unitising portfolio impossible due to timing of information?

#453181

Postby daveh » October 26th, 2021, 12:14 pm

nmdhqbc wrote:
funduffer wrote:The only time you need a portfolio valuation is just before a sale, or a purchase of share with new cash from outside the portfolio.


something to ponder... if you buy the new units when you invest outside cash are you truly monitoring your investment performance? if that cash was sitting in a savings account waiting for an opportune moment to invest it surely that is an investment decision which is not being measured by your unitisation. from the day the cash becomes available to invest to the day you invest it you are excluding it from the performance measurement. for me it makes more sense to add the cash to the portfolio when it has been declared as investable as from that moment on you are making a choice of not investing it yet or investing it and that ongoing decision should be part of how you judge your portfolios performance. I just have an extra column for cash which i add interest to in the spreadsheet rather than matching it up to a specific bank account.


I only count cash when it becomes part of my portfolio. So I have a dollop of cash sitting in bank accounts as my emergency/new car/unexpected expenses fund. I allow that to build up to a set amount after any new car, holiday, house related purchases etc and once at that value any excess will get transferred to my portfolio every so often*. That's the point it gets taken into account in a unit calculation. It might sit as cash inside my portfolio or may be invested in shares etc immediately.

I calculate both accumulation units and income units in a similar way to TJH. For accumulation units the dividends just roll up in the portfolio and a unit calculation is only made when new money is added (or money is taken out - hasn't happened yet as am still in the building phase) and at that point I need to calculate the portfolio value to get the unit value to calculate how many units I need to buy (or sell) with the money moved in (taken out). For income units I do the same thing plus I buy new units with the dividends rather than allow them to roll up. However I can't be bothered doing it exactly on the day every dividend arrives#, I just do it once a month at the end of the month taking all that months dividends as arriving on the last day of the month. Generally this will lead to small inaccuracies that should just about balance out.

* I move money in once every couple of months and aim over the tax year to use up my ISA allowance. If I don't have enough spare cash for this then I'll do a bed and ISA instead as I still have some non tax sheltered holdings.
# if I did it every time a dividend arrived I'd be doing unit calculations 6-10 times a month most months.

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Re: Unitising portfolio impossible due to timing of information?

#453184

Postby Gengulphus » October 26th, 2021, 12:16 pm

stacker512 wrote:So the thread https://lemonfool.co.uk/viewtopic.php?f=15&t=28540 says:

For each time that the portfolio received a dividend, the date, the cash value of the dividend and the value of the portfolio just before the dividend appeared.

How are you supposed to know the portfolio value just before the dividend arrived if the portfolio is made of varying price investments that change every minute / second, and you have no idea what the precise time of the dividend received will be?

Seems one would always have slightly incorrect values to use for the unitisation.

Indeed -but even if you somehow managed to get yourself totally accurate values to use as inputs to the unitisation calculations, the results of those calculations would be a bit out of date by the time you were able to use them for any practical decision-making... Basically, all real-world data is subject to inaccuracies - complete accuracy is only possible for mental constructs such as mathematical number systems and other mathematical theories, and even for them, the practical problem of accuracy is replaced by the practical problem of determining how well they match the real world (*).

The practical answer to that inaccuracy problem is not to ask "Is this totally accurate?" but "Is this sufficiently accurate for my purposes?". And in practice, the individual percentage inaccuracies in a portfolio unitisation calculation produced by share price fluctuations shortly before an individual dividend payment are generally pretty small, and their effects across the large number of dividend payments a HYP produces will be roughly equally in both directions and so average out to even smaller percentage inaccuracies, at least if you're doing the unitisation calculation over a long enough time period (at least a few years) to match the long-term nature of HYPs.

In effect, that means that in "just before the dividend appeared", "just before" can be interpreted quite loosely. Just how loosely one can do it and still get sufficiently accurate results for one's own purposes is a matter for each HYPer to decide for themselves, but I'm personally entirely happy that valuing the portfolio at closing prices on the last trading day before the dividend payment date is sufficiently accurate for my purposes. And I'm pretty happy that the same can be said of the technique (mentioned both in the post you link to and by some in this thread) of treating all dividends paid over a week, a month or possibly even a quarter as a single payment made halfway through the period will still produce pretty accurate results.

On the issue (raised in this thread) of whether to record dividend payments on payment dates or ex-dividend dates, there is indeed an argument for recording them on ex-dividend dates, as that's when a shareholder becomes almost (**) independently entitled to the payments. But there's also an argument against, which is that between the ex-dividend date and the payment date, the shareholder doesn't have access to the dividend - in effect, the dividend goes into a no-access, non-interest-paying bank account on the ex-dividend date, that only matures and pays out on the payment date, and that has a very small chance of not paying out at all. Such notional bank accounts have small negative expected rates of return, and being partially invested in them is essentially a compulsory part of running a HYP (or indeed any other type of dividend-paying share investment strategy). Doing unitisation calculations (or other types of performance measurement calculations such as Internal Rates of Return) using ex-dividend dates rather than payment dates is therefore effectively ignoring a compulsory, negative-return part of the strategy. It's only a small part of the strategy, since the percentage of a HYP's value which is tied up in ex-dividend dividends is probably only something of the rough order of 0.5%, but that does mean that such calculations can be expected to slightly overstate the strategy's real performance if they use ex-dividend dates. (Which is not to say "don't do it that way" - just that if you want to worry about minor inaccuracies, add that one to your list of things to worry about!)

(*) Surprisingly well in many cases as long as you pick the right mathematical theory, and why that's the case is a bit of a philosophical mystery - but not a subject for this board!

(**) "Almost" because it is possible for companies to cancel dividend payments after they've gone ex-dividend. It's a pretty rare event - I'd only seen it happen one or two times this century before the burst of them around March/April last year - but it does happen.

Gengulphus

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Re: Unitising portfolio impossible due to timing of information?

#453187

Postby nmdhqbc » October 26th, 2021, 12:21 pm

Arborbridge wrote:Well, I might decide to invest the cash in something quite different or spend it on lollipops. Do you want to measure your chosen portfolio and compare with other instruments, or measure the financial decision making of your whole lifestyle? As regards this board, I think it is more interesting to know what the HYP is doing and in general that means running a low cash balance (the time to invest being pretty soon!).


The vast vast majority of spending money would come from my cash buffer which is outside of the portfolio as in a dream buying opportunity i would still not use it to buy investments. It would only be a crazy spare of the moment purchase that would go beyond the cash buffer. if that does happen then the cash levels measured in the unitisation get paid out at the moment of madness thus accurately measuring the investable cash from that moment onwards.

seagles wrote:I only take into account cash sitting in the account as I transfer out all dividends from my HYP and use that for other things, sometimes it does get added back in to buy shares but currently not. The only money that stays there are the remains of when I do purchase shares, currently £12.18. The rational is as per Arb, the money is more likely to be used for something else so why should it be accounted for in Unit calculations.


as above, the spending comes from my buffer which is not investable so lies outside of the portfolio. i guess this is more relavant for people in the accumulation phase. if they were the sort to pick their moments to buy into the market rather than monthly purchases then they are timing the market to an extent and that timing of the market would not be measured unless the cash was added to the portfolio when it became investable. not such a big issue for the retired.

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Re: Unitising portfolio impossible due to timing of information?

#453190

Postby nmdhqbc » October 26th, 2021, 12:24 pm

daveh wrote:I only count cash when it becomes part of my portfolio. So I have a dollop of cash sitting in bank accounts as my emergency/new car/unexpected expenses fund. I allow that to build up to a set amount after any new car, holiday, house related purchases etc and once at that value any excess will get transferred to my portfolio every so often*. That's the point it gets taken into account in a unit calculation. It might sit as cash inside my portfolio or may be invested in shares etc immediately.


yep, that's roughly how i do it. assess the levels of spending cash i feel comfy with then put the excess in the portfolio regardless of whether it is invested or not straight away.

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Re: Unitising portfolio impossible due to timing of information?

#453219

Postby Gengulphus » October 26th, 2021, 1:41 pm

nmdhqbc wrote:something to ponder... if you buy the new units when you invest outside cash are you truly monitoring your investment performance? if that cash was sitting in a savings account waiting for an opportune moment to invest it surely that is an investment decision which is not being measured by your unitisation. from the day the cash becomes available to invest to the day you invest it you are excluding it from the performance measurement. for me it makes more sense to add the cash to the portfolio when it has been declared as investable as from that moment on you are making a choice of not investing it yet or investing it and that ongoing decision should be part of how you judge your portfolios performance. I just have an extra column for cash which i add interest to in the spreadsheet rather than matching it up to a specific bank account.

To make the pondering even more complex, add the possibility that you're saving the outside cash with multiple purposes in mind - for instance, one being to invest in your HYP when the time is right (*), another being for a house purchase when you find one that suits your needs without any real idea when you'll find one.

Basically, the only real solution that I know of to such issues is to make a decision about each cash account you have, namely whether it is 'inside' or 'outside' your HYP, and to treat cash movements as additions to the HYP if they are from 'outside' to 'inside', withdrawals from it if they are from 'inside' to 'outside', and as irrelevant to the unitisation calculation if they are from 'outside' to 'outside' or from 'inside' to 'inside' (**). It is possible to treat a cash account as 'partly inside, partly outside' in various ways if you want, but that does tend to complicate the unitisation calculations with a lot more additions to and withdrawals from the HYP, and/or a lot of calculations of just how much of a cash account's balance is 'inside' and how much 'outside'.

So I'd recommend sticking to a simple 'inside' vs 'outside' decision for each cash account, and accepting the fact that where a cash account has multiple uses, those decisions are liable to distort the results of the unitisation calculations a bit. Those distortions can be minimised by making the 'inside' vs 'outside' decision for each account according to how it's mainly been used - for example, my own HYP is split between three unsheltered trading accounts, two ISA accounts and a SIPP account (for historical reasons - this is not a recommendation!). Two of the trading accounts, both ISAs and the SIPP are exclusively in use for the HYP at present and have only occasionally held shares picked by other strategies in the past, so treating their cash balances as 'inside' the HYP won't produce any significant distortions to the results of the unitisation calculations. The other trading account is more difficult - both a more complex history (it's the first trading account I opened) and its current composition produces conflicting arguments: by value, it's about a third HYP shares, two-thirds smallcap shares, while by number of transactions, the HYP is more important due to its large number of dividend payments. I've opted to treat its cash balance as 'outside' the HYP, but it was liable to produce noticeable distortions either way, so it wasn't an easy decision!

(*) Which needn't involve trying to 'time the market', by the way - another form of the time being right is the arrival of a new tax year and its ISA allowance, so that you can continue to avoid the tax issues associated with unsheltered shareholdings.

(**) Incidentally, the fundamental difference between accumulation unitisation and income unitisation is essentially that the former treats dividends as coming from somewhere 'inside' the portfolio and the latter treats them as coming from somewhere 'outside'.

Gengulphus

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Re: Unitising portfolio impossible due to timing of information?

#454024

Postby stacker512 » October 28th, 2021, 11:59 pm

I've been away from the PC for a number of days so slowly processing all the replies. Thanks to all that replied.

Newroad wrote:Both case (1) and case (2) simply wrap up dividends, distributions, tax relief etc since the last measurement and these are not construed as adding units. The only time I add (or subtract) units is when I invest (or drawdown) additional funds.


Would you add units if you used the proceeds of a sale of existing shares to buy different shares?
ie.
2021-10-26 Sell fund A
2021-10-26 A row for post-sell valuation after selling fund A
2021-10-27 Buy fund B
2021-10-26 A row for post-buy valuation after buying fund B

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Re: Unitising portfolio impossible due to timing of information?

#454027

Postby stacker512 » October 29th, 2021, 12:07 am

Hypster wrote:
stacker512 wrote:How are you supposed to know the portfolio value just before the dividend arrived


Your reference to prices changing by the second suggests you are taking the "just before the dividend appeared" instruction too literally. Just take the portfolio value using the closing prices of the night before. When I first unitised, I created a spreadsheet that pulled in the closing price for each of my holdings on any given date. However, now I track my portfolio in Stockopedia and if ever I forget about a dividend its very easy to scroll back over the valuation chart. Either way, once you're up and running, monitor your holdings as to when they announce their dividends and make a note of the relevant dates (you can track these in spreadsheet or pop a scheduled transaction in your money manager app (Microsoft Money, YNAB, etc).


I think I am taking it too literally, for sure.
I've so far been pretty lax about it, but mainly because I struggled to make sure the data was "in time". Although that doesn't sound as important now.

The HYP Top Up spreadsheet helps with knowing when the ex-div is, although seems to not show future ones unless they are "soon". For example, my entry for ASEI IT shows Ex-div in the past, 2nd September, and payment date also in the past, 24th September.

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Re: Unitising portfolio impossible due to timing of information?

#454029

Postby stacker512 » October 29th, 2021, 12:12 am

Arborbridge wrote:If income were retained (eventually to be reinvested, one assumes) these would be accumulation units - because as the name suggested they "accumulate" the income. This does not alter the number of units, only the price. The number of accumulation units only alter if cash is added or within drawn - as mentioned by Chris Searle. If some of the cash retained is used to buy shares, no action is needed, which makes acc. units easy to operate.

Arb.


This is illuminating to me. Thank you. It would appear I'm going to be operating accumulation units then, as I'm not yet taking income from my pension (even my ISA is also not having income taken out of it).

I've corrected my spreadsheet to not include the recent dividends I've received.

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Re: Unitising portfolio impossible due to timing of information?

#454047

Postby Arborbridge » October 29th, 2021, 7:27 am

stacker512 wrote:
Arborbridge wrote:If income were retained (eventually to be reinvested, one assumes) these would be accumulation units - because as the name suggested they "accumulate" the income. This does not alter the number of units, only the price. The number of accumulation units only alter if cash is added or within drawn - as mentioned by Chris Searle. If some of the cash retained is used to buy shares, no action is needed, which makes acc. units easy to operate.

Arb.


This is illuminating to me. Thank you. It would appear I'm going to be operating accumulation units then, as I'm not yet taking income from my pension (even my ISA is also not having income taken out of it).

I've corrected my spreadsheet to not include the recent dividends I've received.


Just to add to the confusion: it's possible to calculate both accumulation units and income units for the same portfolio :lol:

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Re: Unitising portfolio impossible due to timing of information?

#454052

Postby nmdhqbc » October 29th, 2021, 7:56 am

Arborbridge wrote:
stacker512 wrote:
Arborbridge wrote:If income were retained (eventually to be reinvested, one assumes) these would be accumulation units - because as the name suggested they "accumulate" the income. This does not alter the number of units, only the price. The number of accumulation units only alter if cash is added or within drawn - as mentioned by Chris Searle. If some of the cash retained is used to buy shares, no action is needed, which makes acc. units easy to operate.

Arb.


This is illuminating to me. Thank you. It would appear I'm going to be operating accumulation units then, as I'm not yet taking income from my pension (even my ISA is also not having income taken out of it).

I've corrected my spreadsheet to not include the recent dividends I've received.


Just to add to the confusion: it's possible to calculate both accumulation units and income units for the same portfolio :lol:


I thought i'd take a stab at giving a scenario / reason why you might want to measure both inc and acc units. The inc units do add considerable record keeping etc. so you may well decide it's not worth the effort.

how it works when no dividends get paid out of portfolio: All the dividends paid within the portfolio notionally get paid out of the portfolio and instantaneously buy more inc units leaving the portfolio size the same with a lower inc unit price but with more inc units to equalise it all out. By doing this the acc units are unaffected. acc unit price stays the same, number of acc units stays the same.

By calculating inc units you can see how much your portfolios dividend is increasing by each year under it's own steam. The added capitals affect on the dividend gets stripped out. So if you were close to retirement you could get a feel for how your portfolios dividend is growing if you did retire and inevitably stopped adding capital to the portfolio.

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Re: Unitising portfolio impossible due to timing of information?

#454059

Postby Newroad » October 29th, 2021, 8:41 am

Hi Stacker512.

No, if I simply sold one equity and bought another with the proceeds, that would have no effect on the number of units. This would be true even if the trades happened on different days.

It is of course likely to have a small effect on the value of the units at the end of the day, or days in the case of multi day trades (which is when I would do the accounting for it/them).

Regards, Newroad

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Re: Unitising portfolio impossible due to timing of information?

#454063

Postby funduffer » October 29th, 2021, 8:57 am

Newroad wrote:Hi Stacker512.

No, if I simply sold one equity and bought another with the proceeds, that would have no effect on the number of units. This would be true even if the trades happened on different days.

It is of course likely to have a small effect on the value of the units at the end of the day, or days in the case of multi day trades (which is when I would do the accounting for it/them).

Regards, Newroad

I agree with this.

I would however record the sale and purchase as separate lines, as the transaction costs would change the number of units marginally, but it is a small effect in the grand scheme of things.

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Re: Unitising portfolio impossible due to timing of information?

#454066

Postby nmdhqbc » October 29th, 2021, 9:03 am

funduffer wrote:I would however record the sale and purchase as separate lines, as the transaction costs would change the number of units marginally, but it is a small effect in the grand scheme of things.


i would have thought transaction cost would be part of what gets measured by the unitisation. part and parcel of the unit price. just like in an open ended fund. the charges and costs are all built into the price each day. you don't buy more fundsmith units to pay terry his fees and costs.

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Re: Unitising portfolio impossible due to timing of information?

#454068

Postby funduffer » October 29th, 2021, 9:10 am

nmdhqbc wrote:
funduffer wrote:I would however record the sale and purchase as separate lines, as the transaction costs would change the number of units marginally, but it is a small effect in the grand scheme of things.


i would have thought transaction cost would be part of what gets measured by the unitisation. part and parcel of the unit price. just like in an open ended fund. the charges and costs are all built into the price each day. you don't buy more fundsmith units to pay terry his fees and costs.


Interesting point!

If I sold share A, then bought it back again with the proceeds, I would have fewer shares due to transaction costs, but the same number of inc/acc units?

I can't get my head around this!

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Re: Unitising portfolio impossible due to timing of information?

#454074

Postby nmdhqbc » October 29th, 2021, 10:15 am

funduffer wrote:If I sold share A, then bought it back again with the proceeds, I would have fewer shares due to transaction costs, but the same number of inc/acc units?


yep. The number of units only change when...

acc: add or take out cash from the portfolio. In retirement this might be the dividend payments being paid out. For the acc units that manifests itself as selling acc units.

inc:
1) capital in/out of portfolio. dividends do not count for this. they lower the unit price instead.
2) pay out the dividends periodically (or each time a dividend is paid if you really want to put the time in). Those dividend payments do NOT need to be actually paid out of your portfolio. to keep the dividends inside the actual portfolio you would just buy more inc units to keep the (num. units)*(unit price) the same value.

The transactions you make within the portfolio do not need to have any input into the unitisation spreadsheet. You can just log into your accounts and input the total value into your spreadsheet to value the portfolio. add up the dividends paid into the accounts for tracking income to get paid out for inc units.

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Re: Unitising portfolio impossible due to timing of information?

#454076

Postby daveh » October 29th, 2021, 10:19 am

funduffer wrote:
nmdhqbc wrote:
funduffer wrote:I would however record the sale and purchase as separate lines, as the transaction costs would change the number of units marginally, but it is a small effect in the grand scheme of things.


i would have thought transaction cost would be part of what gets measured by the unitisation. part and parcel of the unit price. just like in an open ended fund. the charges and costs are all built into the price each day. you don't buy more fundsmith units to pay terry his fees and costs.


Interesting point!

If I sold share A, then bought it back again with the proceeds, I would have fewer shares due to transaction costs, but the same number of inc/acc units?

I can't get my head around this!


Yes of course. Your portfolio is a black box, what happens in the portfolio stays in the portfolio. Unit numbers only change if things move in or out of the portfolio*. So in the situation you describe eg you sell 10 shares of A at £10 each and buy back 9 shares at £10 pound each plus pay £10 in dealing fees. You start with a portfolio containing 10 shares in A valued at £100. You unitise it with 100 units valued at £1 each. After your sale and rebuy you now have a portfolio consisting of 9 shares in A value £90 and there are still 100 units but now there value is 90p each.

* for accumulation units dividends roll up within the portfolio and increase the portfolios value - the number of units remains the same and the unit value increases. For Income units the dividends are not counted as part of the portfolio. When a dividend is paid if it is transferred into the portfolio for reinvestment it buys new units. So the unit value stays the same but the number of units increases.


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