tag:blogger.com,1999:blog-5465015914589377788.post4280436637743971861..comments2021-06-13T10:39:33.159-04:00Comments on Michael James on Money: How to Calculate Investment ReturnsMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-5465015914589377788.post-29782835165432713632013-01-30T10:24:31.250-05:002013-01-30T10:24:31.250-05:00@AnatoliN: I'm not sure I can help with the b...@AnatoliN: I'm not sure I can help with the bulk or rigidity, but one trick I use to reduce errors is that I record all transactions to make sure my data matches the account balance. Then I know I haven't recorded an entry with the wrong sign (+/-). A disadvantage is that this involves recording every transaction even though most of them are irrelevant for the IRR computation.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-29304852039433060802013-01-30T10:16:37.600-05:002013-01-30T10:16:37.600-05:00I am looking for a spreadsheet, your explanations ...I am looking for a spreadsheet, your explanations on IRR calculation were sufficient. Ideas I have so far are either too bulky and rigid or insufficiently error-proof. AnatoliNhttps://www.blogger.com/profile/07937984526970646627noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-83736733850794724462013-01-30T08:32:03.577-05:002013-01-30T08:32:03.577-05:00@Colin: Thanks. The XIRR spreadsheet function ca...@Colin: Thanks. The XIRR spreadsheet function can do all of this for you. Start with all the cash flows in chronological order. Make sure that there are "account balance" and "starting investment" entries at the end of each year. You can think of the "starting investment" entries as the beginning of each year, and the "account balance" entries at the end of each year. Then just apply the XIRR function to whatever span of years you like; it will give you the compound average annualized return.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-9862201926087418752013-01-30T01:18:43.029-05:002013-01-30T01:18:43.029-05:00Great post. Any idea how you would "string to...Great post. Any idea how you would "string together" your yearly returns to come up with your average rate of return since the start? It would also be nice to track say your 3yr, 5yr, 10yr returns as well.Colinnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-85333634811268071812013-01-25T17:00:27.776-05:002013-01-25T17:00:27.776-05:00@AnatoliN: If you want to calculate your IRR for ...@AnatoliN: If you want to calculate your IRR for a collection of accounts that represent your whole portfolio, the process is similar to what I described in the post. All that matters is the cash flows from outside all the accounts; cash flows between accounts don't matter. To get your return in some time period, you need the account value at the beginning and end of the period and the external cash flows. That's it.<br /><br />If you're looking for spreadsheet tools to help with rebalancing, I have that for my own portfolio, but I haven't figured out how to make it generic enough to be useful to others yet.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-63680243426217955142013-01-25T16:49:36.795-05:002013-01-25T16:49:36.795-05:00Michael, would you also share a spreadsheet format...Michael, would you also share a spreadsheet format for portfolio management? Let's say I have several investments accounts each containing several funds, I contribute, I shift between accounts, I re-balance... And I want to see IRRs. AnatoliNhttps://www.blogger.com/profile/07937984526970646627noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-53432951358161667382013-01-23T08:31:14.609-05:002013-01-23T08:31:14.609-05:00@James: Either way works as long as you're co...@James: Either way works as long as you're consistent. It just comes down to your mental model. Suppose someone comes to you to pitch an investment where you give them $10,000 now and they return $3000 per year for 5 years. Because it feels like you're giving money away initially and getting it back later, the $10,000 seems negative and the multiple $3000 amounts feel positive. In the case of an investment account, it may feel to you more as though the money is remaining under your control so that the contributions are positive. You're thinking about it from the account's point of view rather than the point of view of the person (you) who does the deposits or withdrawals. Either way of thinking gives the same return as long as you don't mix them.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-25393948253139691952013-01-22T22:51:39.061-05:002013-01-22T22:51:39.061-05:00Michael,
I have always made my contributions as a...Michael,<br /><br />I have always made my contributions as a positive number and subtracted my balance at the end. Seems to give similar results. Why do you subtract contributions and add deductions and not the reverse? <br /><br />Thanks,<br /><br />JamesJameshttps://www.blogger.com/profile/13830014087653506818noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-57613773244284397862013-01-22T18:05:30.703-05:002013-01-22T18:05:30.703-05:00@Patrick: You're welcome. The key is to thin...@Patrick: You're welcome. The key is to think in terms of the black box.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-66471854496970368872013-01-22T16:49:15.165-05:002013-01-22T16:49:15.165-05:00Wow, thanks Michael. It's far from obvious th...Wow, thanks Michael. It's far from obvious that only deposits, withdrawals, and balances actually matter. I've never tried to compute IRR but I'm sure I would have taken quite some effort to rediscover this fact.Patrickhttps://www.blogger.com/profile/16816252455472704262noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-59865436182945117172013-01-22T16:16:27.801-05:002013-01-22T16:16:27.801-05:00@Simply Rich Life: I prefer IRR to approximate me...@Simply Rich Life: I prefer IRR to approximate methods. In the past, IRR was difficult to compute, but it's easy now that it's built right into spreadsheets.<br /><br />Going back and recalculating past years returns to reflect the fact that you didn't realize certain capital gains is one approach. I'm not sure there is any clearly best approach here.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-43084283434232144772013-01-22T15:11:22.933-05:002013-01-22T15:11:22.933-05:00The alternative mentioned was at http://www.canire...The alternative mentioned was at http://www.caniretireyet.com/computing-your-overall-investment-return/ (Time-Weighted Returns). The choice to use one or the other depends on what you want to measure so XIRR works for me.<br /><br />For the impact of taxes I would probably be most interested in knowing the long-term after tax return (from purchase to sale). The closest you could get to calculating this is to include the longest time period available each time you do the calculation. As you pointed out that number could shift due to the length of time included so the result might not end up being meaningful. At least dividends and interest are simpler :)Simply Rich Lifehttp://simplyrichlife.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-83953604737982112972013-01-22T10:52:13.478-05:002013-01-22T10:52:13.478-05:00@Big Cajun Man: The XIRR function is in both Excel...@Big Cajun Man: The XIRR function is in both Excel and Google spreadsheet. The links I placed in this post are to Google spreadsheets.<br /><br />@Simply Rich Life: Deducting any actual taxes paid each year definitely makes sense. Where things become more difficult is built-up capital gains on an asset you hold for many years. The yearly drag on returns due to capital gains taxes is lower the longer you hold an asset. One way to handle this is to estimate taxes each year if you liquidated and deduct this amount from the portfolio, but you'd have to reset the adjusted cost base (ACB) each year or else you'll be charging the same taxes every year. This method overly penalizes early years, but isn't too bad. Any other method I've thought of involves predicting in advance how long you'll hold an equity.<br /><br />How you handle varying tax rates depends on what you're trying to achieve. If you want a consistent view of the profitability of your stock-picking skills in a taxable account compared to other investors, you're method of sticking to one tax rate seems good. If you want to measure your skills at investing while taking into account your varying tax rate, then it makes sense to use real rates.<br /><br />I think the quarters idea was a comment on the Million Dollar Journey post. Splitting into quarters or splitting at trade points isn't any more accurate. XIRR accurately takes into account cash flows at different times. However, some people may want a more fine-grained view of their returns. I'm happy with yearly figures, but I can see some people preferring quarterly figures. I don't see much sense in getting figures every time you make a trade. Believing that this somehow gives a more accurate view indicates to me that the person doesn't understand how XIRR works. The internal rate of return isn't a perfect measure, but its limitations aren't related to mishandling transaction timing.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-15046381502181111612013-01-22T10:16:10.382-05:002013-01-22T10:16:10.382-05:00For the taxable accounts, would you estimate the p...For the taxable accounts, would you estimate the potential taxes owing (for example the capital gains tax on the price gain) at the end of the year and then subtract that from the balance to get the after-tax return? As long as you can get a good estimate that seems like the most accurate way. <br /><br />If you find yourself moving between different tax brackets you could establish one tax rate (the highest one) to use for these calculations so you can get a consistent view of your returns.<br /><br />Another blog recently posted about return calculation methods and included one I hadn't thought of - splitting the year into quarters (or to be more accurate, splitting it at each point when you make a trade), calculating the return for each of these periods, and then stringing them together.<br /><br />This is supposed to give a more accurate view of the effects of your security selection (or asset allocation) with less impact from the timing. It sounds interesting but although I find XIRR very easy to use, this other method sounds too time-consuming.Simply Rich Lifehttp://simplyrichlife.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-78819307646061725882013-01-22T06:58:08.467-05:002013-01-22T06:58:08.467-05:00Excellent stuff, and even better that the spreadsh...Excellent stuff, and even better that the spreadsheets can help out so easily. I assume the XIRR is available on Google Spreadsheet too?Big Cajun Manhttp://canajunfinances.comnoreply@blogger.com