Settlement Lag Time

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Posted by Wayne G on July 21, 2007 at 22:38:30:

While I am quickly becoming a fan of FM, one bit of functionality that is somewhat vexing to me is the same-day exchange between a buy or sell transaction and the designated "cash account". While I can see the convenience this automatic posting offers many users, I have found instances in my imported transaction history where the settlement of a transaction took several days to move funds into or out of a portfolio's cash (money market) fund. There are two problems with using the FM automatic exchange between the cash account and a buy or sell transaction in these instances.

First is the obvious difference in transaction dates. The date the settlement occurs is not always the same date that the investment transaction occurred. Of course, one could use the account's settlement date as the date of the buy or sell transaction, then the auto exchange would work fine. The problem with this is that for tax reasons, the buy or sell date is the date you actually buy or sell, not the settlement date. The IRS is particular about documenting accurate transaction dates for determining the correct treatment of capital gains.

Second, if instead one enters the actual investment transaction date and then a different settlement date (money actually flowing into or out of the cash account) the problem you find is that there is a discrepancy in the account's balance for the period between those two dates. This tends to show up as a "spike" on a valuation graph, where in reality there is no increase or decrease in the portfolio's valuation - just an anomaly in how FM accounts for the settlement period.

To remedy these problems I decided to create a settlement cash investment which is different than the account's money market fund investment. I designate this settlement investment as the sub-portfolio's "cash" account and then make separate entries for every transaction.

So for example, if I sell investment "A", the proceeds from that sale automatically move to the "settlement" account (since it's my designated FM cash account). Then when the sell transaction settles, even if it's the same day, there is a separate transaction where the settlement funds flow from the settlement (cash) account into the actual money market account. A similar sequence occurs for a buy transaction. In this manner the portfolio valuation is constant during a multi-day settlement period and the dates entered for each transaction are correct.

This may seem like additional work, but I believe it more accurately reflects the cash flows that are incurred during real-life brokerage transactions. Perhaps other users would find this method applicable to their own portfolios. If there is another approach for accomplishing the same accounting of transactions in FM I would welcome hearing about it.

Keep up the good work!

Replies:

• Re: Settlement Lag Time Mark 13:29:36 07/22/07 (0)