Equity Curves

We went through the example account and how to set-up a new account. However, we only looked at the entering of data and changing date ranges. Now let’s look at the graphs in the Equity Charts tab and go over the difference between charting VAMI vs. Account Value; using the example portfolio account.

There are two ways in which to plot the equity curve on the main graph; either Account Value or VAMI. Both equity curves are plotted using a logarithmic y-scale. This allows you to see how smooth your linear growth is even though your portfolio is growing exponentially.

ACCOUNT VALUE

For the account value graph, all that is necessary is to enter the month ending balance that you get from your broker's statement in the Account Value column. However, there is a negative side affect to only graphing this equity curve. Although it does show how your ‘actual’ money has grown over the specified period of time, the equity curve can in fact be distorted. Most investors want to see a smooth equity curve that denotes less risk and consistent growth. With normal deposits and withdrawals, however, spikes will be present in the graph that are not actual gains and losses. This leads to the benefit of using VAMI.

VAMI

VAMI takes care of the negative side affects present with just graphing the Account Value. This is accomplished by filling in your deposits and withdrawals for the specified month by entering the amount in the "+/-" excel column and then choosing to graph the VAMI equity curve. VAMI, or Value Added Monthly Index, is commonly used by many commodity trading advisors and investment professionals. It is useful because it bases performance on an initial investment of $1000 and compensates the effects that deposits and withdrawals would have on the equity curve. This gives you the most realistic view of your portfolio performance. For example, if you make a deposit into your account, the Account Value graph would make this look like a gain for that month. In reality, however, this is not a gain and should not be factored into your monthly performance graph. VAMI disregards this deposit as a change in return and only factors in the real change for that month.