Comments on: What is my Portfolio Return?

By: Hung

Hung — Thu, 06 May 2010 09:34:03 +0000

Agree that if your portfolio had distribution and withdrawal of invested capital during the period, The right way to calculate, what Morningstar call “personal return”, is XIRR. This function allows calculates internal rate of return with non-interval cashflows. As a result, “Personal Return” can shows how well you manage your investment.
However to see how your portfolio allocation performs, comparing to benchmark return, “personal return” can not be used. Reason is that benchmark calculates with assumption that all capital are reinvested, no inflow no outflow. Therefore, to see how good is your allocation without interaction of market-timing skill, you need to use another one, called “total return”.
Hope this helps,
How to calculate => sorry I personally dont know, try to find out now

By: nik

nik — Fri, 27 Mar 2009 19:42:00 +0000

does anyone know of a decent/reputable online dietz / time-weighted return calculator?

By: Jodie

Jodie — Sat, 09 Jun 2007 00:15:25 +0000

Okay…so using Excel…Do I want to put in the opening balance of my investment? And then all of my deposits, right? Then, my closing balance? It has to have negatives, what do I do about that? Thanks.

By: Dave

Dave — Sun, 21 Jan 2007 10:42:18 +0000

Neville,

It’s XIRR, look it up on Google. You can do it on any spreadsheet program, just be careful not to include dividends as a cash in-flow. The cash in-flows and out-flows are only those that came from you to the investment or from the investment to you.

By: Neville

Neville — Thu, 18 Jan 2007 13:50:07 +0000

if the formula used by mutual funds, when they advertise their performance statistics to attract more cusotmers, was used by private investors, we could compare our portfolios with the professionals performance.

can any ‘responder’ on this site provide the formula ?

CNN had a formula (now apparently discontinued) in which initial values, dates of sales, purchases, dividends etc. were recorded for the period, e.g. 1 year, and the annual percentage return was calculated.

By: Dave

Dave — Thu, 04 Jan 2007 05:21:49 +0000

Sorry for not posting my comment here…I already had one long comment…didn’t want to hijack the entire thread and make it my personal soapbox.

By: Investing Intelligently » Blog Archive » IRR and Returns on Portfolios

Investing Intelligently » Blog Archive » IRR and Returns on Portfolios — Thu, 04 Jan 2007 05:17:58 +0000

[...] There is a very interesting discussion at the Canadian Capitalist’s blog about how to determine performance and there was some talk of Internal Rates of Return (IRR): [...]

By: Canadian Capitalist

Canadian Capitalist — Thu, 04 Jan 2007 04:01:23 +0000

It is true that IRR is the true measure of performance but what I did in my earlier post was compare the IRR of my actual portfolios with the annual return of the benchmark (to which no money was added). That is really comparing apples to oranges. Like Enough Wealth notes, it is far too troublesome keeping track of the benchmark for every little bit added to the portfolio.

Phil: I do think that you should worry about and track relative returns, so that you know exactly how well (or badly) you are doing compared to a passive portfolio that is a snap to construct. If you find that you are beating the pants off your benchmark, you should continue to do your magic (and hope it persists in the future). I suspect too many investors would find that their stock-picking abilities (after all studies show that even the majority of professionals have difficulty beating the indices) really suck and they are better served with just a passive portfolio.

By: Dave

Dave — Wed, 03 Jan 2007 22:11:06 +0000

Phil,
You sound just like my dad when you say “different investments are made at different times in the year” and “total returns in my portfolio in 2006 range from +50% to -5%”. My dad invests a whack of cash at the same time every year, in June, so then he can easily see in the following June what his return for that previous 12 months were. (He sometimes buys more investments throughout the year but doesn’t bother calculating performance of those). When I tell him that you can invest at any time in the year and use XIRR to figure out your investments’ annualized returns, he still doesn’t get it, and says “but different investments are made at different times in the year?” Read about about XIRR, learn how to use, and don’t tell people that “average annual returns don’t make any sense because it’s usually all over the map” and “average returns are rather irrelevant,” unless you really know what you are talking about.

Careful with your terminology, average annual return is something different. Most of us here are talking about “annualized rate of return” over a given period.

You say that you care about “what is it worth today if I sold it” and its “original cost”. Well what if you bought $1000 of an investment 1 year ago. It gained 50% and is now worth $1500. Just last month you bought another $10000 of that same investment because you were amazed at how well it did. That $10000 has stayed still and is still worth $10000. So your total cost is $11000 and your investment is worth $11500. I think what you would have done is looked at the final divided by initial and said, hey, my investment has gone up 4.5%! (Or would you have taken into account the fact that these two purchases were made at different times? Or do you just give up and not worry about the actual percentage return?) But the IRR is actually 28%. Incidentally, the underlying investment went up 50% during that year (from $1500 to $1000). So we ruined our nice 50% return a bit by that $10,000 buy late in the year, but whatever. 4.5% is a return but it is not very interesting or meaningful. Finding out that our annualized return was 28% is meaningful, however.

Rob makes an important point that an investment should be compared to other investments using the same time and date. Taking your portfolio, finding the 10-year annualized return using XIRR and then comparing that to the 10-year return of benchmark indexes and such is a good idea. Taking a total return like 4.5% in the above example and comparing that to benchmark indexes makes no sense.

That’s it for my rant for now.

By: Rob

Rob — Wed, 03 Jan 2007 19:29:10 +0000

IRR (or XIRR)is it when evaluating how the INVESTOR did. It correctly calculates the weighted average return of every dollar for the exact amount of time it has been in the plan. It is also called a “dollar-weighted” rate of return.

IRR reports what the INVESTOR got and it is obviously a very important number, but it has drawbacks for evaluating whether an INVESTMENT is good.

The IRR may be low if the investor bought at a high or sold at a low. The timing of these cash flows affects the return a great deal and the INVESTMENT obviously can’t control this.

If you want to know an INVESTMENT did, you need to eliminate the impact of different cash flows. The INVESTMENT must be compared to other investments using the same end date. This is called a “time-weighted” rate of return. Examples of this are the numbers found in mutual fund tables which show 1,3,5, and 10 year RORs.

Many times the INVESTMENT yields great returns, although the INVESTORS don’t do as well. Buying high and selling low will always be the cause of this.

Smart investors will always use the specific method that takes the ‘data’ and provides the best ‘information’.