Personal Rate of Return
Personal Rate of Return
How do you properly track or match your personal rate of return vs. a particular index fund when contributing $$ monthly to an investment account? Wont the returns be extremely different?
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Personal Rate of Return
Joe:
I use index funds so there is nothing to track.
Keep investing simple.
Best wishes.
Taylor
I use index funds so there is nothing to track.
Keep investing simple.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Personal Rate of Return
Conventionally that is internal rate of return using the XIRR add-in in EXCEL or an equivalent application.joetaf27 wrote:How do you properly track or match your personal rate of return vs. a particular index fund when contributing $$ monthly to an investment account? Wont the returns be extremely different?
The point is that the computation takes into account the size and point in time of contributions and withdrawals and delivers the "effective" investment return for the amounts invested, when they were invested. XIRR in EXCEL delivers an annualized result for any arbitrary time period.
Re: Personal Rate of Return
I calculate my return for each year using XIRR (there are many past discussions on how to do this calculation), and I compare this return to my benchmark.
There is an inconsistency with this method, since the XIRR is a money-weighted return and the benchmark return is typically a time-weighted return. I once wrote a blog post attempting to explain and demonstrate the difference between the various return calculation methods: http://www.calculatinginvestor.com/2011 ... t-returns/
I'm now at a point where my annual contribution is small enough relative to my total account value that the time-weighed vs. money-weighted issue is minor, but it is good to be aware of the issue regardless. Comparing one type against the other is a bigger problem when the starting balance is small compared to the contributions over the period being evaluated.
There is an inconsistency with this method, since the XIRR is a money-weighted return and the benchmark return is typically a time-weighted return. I once wrote a blog post attempting to explain and demonstrate the difference between the various return calculation methods: http://www.calculatinginvestor.com/2011 ... t-returns/
I'm now at a point where my annual contribution is small enough relative to my total account value that the time-weighed vs. money-weighted issue is minor, but it is good to be aware of the issue regardless. Comparing one type against the other is a bigger problem when the starting balance is small compared to the contributions over the period being evaluated.
Last edited by camontgo on Mon Aug 26, 2013 1:58 pm, edited 1 time in total.
"Essentially, all models are wrong, but some are useful." - George E. P Box
Re: Personal Rate of Return
Hi Taylor-
What do you mean you use index funds so there is nothing to track?
What do you mean you use index funds so there is nothing to track?
Re: Personal Rate of Return
One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.Taylor Larimore wrote:Joe:
I use index funds so there is nothing to track.
Keep investing simple.
Best wishes.
Taylor
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- Joined: Wed Jun 27, 2012 12:05 pm
Re: Personal Rate of Return
I am not the esteemed Mr. Larimore, but I think what he means is if you are investing in the market via an index fund, you get what the market returns minus your expense ratio. You aren't going to "beat it" so your returns are not necessary to track. You just ignore it and do other interesting things with your money and your life.joetaf27 wrote:Hi Taylor-
What do you mean you use index funds so there is nothing to track?
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Personal Rate of Return
an_asker:an_asker wrote:One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.Taylor Larimore wrote:Joe:
I use index funds so there is nothing to track.
Keep investing simple.
Best wishes.
Taylor
I don't need to know my "personal rate of return" (which changes every day). It is what it is.
Keep investing simple.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Personal Rate of Return
I don't track mine either. If I came up with a number, I don't know what I'd do with it.
I always wanted to be a procrastinator.
- LAlearning
- Posts: 1365
- Joined: Wed May 09, 2012 12:26 pm
- Location: Los Angeles
Re: Personal Rate of Return
I agree with Mr. Larimore. It doesn't matter if you own it all.
However, sometimes it is nice to see what DCA is doing to your returns or to prove a point to someone about their broker buying/selling continuously. For this, search "XIRR Function Excel." There are multiple threads on this topic here.
However, sometimes it is nice to see what DCA is doing to your returns or to prove a point to someone about their broker buying/selling continuously. For this, search "XIRR Function Excel." There are multiple threads on this topic here.
I know nothing!
Re: Personal Rate of Return
I'm not concerned enough about my portfolio's return each year to go through the work of XIRR for an accurate figure, but I like to get a rough idea. So the last couple of years, I've used mymonneyblog's rate of return calculator for a quick estimate. My contributions are usually pretty uniform as they come from each paycheck, so I figure it's probably accurate enough for my purposes.
http://www.mymoneyblog.com/estimate-you ... lator.html
http://www.mymoneyblog.com/estimate-you ... lator.html
Re: Personal Rate of Return
I don't bother but I disagree that it's irrelevant if you use index funds?????? Anyone in the accumulation phase is adding money at various points and anyone in the draw down phase is selling at various points - so their actual returns will NOT match the published index funds. If you care about returns (and I don't) then a personal ROR is better then using the published figures.
|
Rob |
Its a dangerous business going out your front door. - J.R.R.Tolkien
Re: Personal Rate of Return
Is there a "like" button somewhere?Taylor Larimore wrote:
I don't need to know my "personal rate of return" (which changes every day). It is what it is.
Re: Personal Rate of Return
I find it hilarious that Bolgeheads recommend a set-it-and-forget-it investing strategy -- they're more obsessive than most!
Cheers, Guys -- gotta be one to know one!
Cheers, Guys -- gotta be one to know one!
Re: Personal Rate of Return
Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.McCharley wrote:I find it hilarious that Bolgeheads recommend a set-it-and-forget-it investing strategy -- they're more obsessive than most!
Cheers, Guys -- gotta be one to know one!
I always wanted to be a procrastinator.
Re: Personal Rate of Return
Not necessarily.Sidney wrote:Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.McCharley wrote:I find it hilarious that Bolgeheads recommend a set-it-and-forget-it investing strategy -- they're more obsessive than most!
Cheers, Guys -- gotta be one to know one!
Observing any differences between personal return and market return could highlight problems in someone’s investment strategy, which could then be corrected. For example, allowing emotions to interfere with accumulation or withdrawal timing and amounts could easily reduce personal returns. If I remember correctly, Morningstar has made a good point that investor performance generally lags the performance of the funds they invest in. Well there you go, that's why you need to care. Don't always assume you are doing everything correctly, and keep an occasional check things to prevent small problems from becoming big ones.
Carpe: pick, pluck, pluck off, gather
Re: Personal Rate of Return
Taylor:Taylor Larimore wrote:an_asker:an_asker wrote:One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.Taylor Larimore wrote:Joe:
I use index funds so there is nothing to track.
Keep investing simple.
Best wishes.
Taylor
I don't need to know my "personal rate of return" (which changes every day). It is what it is.
Keep investing simple.
Best wishes.
Taylor
But you are not OP! What is of no consequence to an octogenarian cannot necessarily be of no consequence to a teenager. For instance, if someone asks "What is the best birthday present I could get for my dad?" and you answer "Nothing! I do not need to purchase anything for my dad, he passed away a while back" then what good would that answer (though perfectly valid for you) be to the asker?
BTW, I'm with you on not needing to know a personal rate of return (too complicated, yields no real value), but that still fails to answer OP.
Re: Personal Rate of Return
I recently went through the process of creating a spread sheet to track my personal rate of return utilizing XIRR. It probably took me a couple of hours to import historical data and setup all the calculations. It now only takes me about 5 minutes once a month to maintain.
I agree that there is probably very little value in knowing your personal rate of return. I do not plan on making any changes based on the numbers I calculate and I have not been tempted to at all. Despite this I couldn't help but feel negligent when I wasn't keeping track of this data. To have the majority of my net worth invested and to not keep track of my performance just didn't seem right.
I'm also a numbers guy and enjoy keeping track of these things and making spread sheets. I find it motivating to be able to look up historical data and see how far I've come in so few years. I haven't been investing through a bear market yet so my opinion might change once I get there. Perhaps those are the times to just bury your head in the ground and try to ignore your portfolio.
I agree that there is probably very little value in knowing your personal rate of return. I do not plan on making any changes based on the numbers I calculate and I have not been tempted to at all. Despite this I couldn't help but feel negligent when I wasn't keeping track of this data. To have the majority of my net worth invested and to not keep track of my performance just didn't seem right.
I'm also a numbers guy and enjoy keeping track of these things and making spread sheets. I find it motivating to be able to look up historical data and see how far I've come in so few years. I haven't been investing through a bear market yet so my opinion might change once I get there. Perhaps those are the times to just bury your head in the ground and try to ignore your portfolio.
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Personal Rate of Return ?
crake:
I am in retirement and occasionally check my balance to ascertain that I'm not to depleting my portfolio faster than planned.
During accumulation, I think it is helpful to occasionally check one's balance to determine of the portfolio performance is on track towards retirement and other goals. If not, goals may need to be changed or greater contributions may be necessary.
Best wishes.
Taylor
I am happy you find your historical data helpful.I find it motivating to be able to look up historical data and see how far I've come in so few years.
I am in retirement and occasionally check my balance to ascertain that I'm not to depleting my portfolio faster than planned.
During accumulation, I think it is helpful to occasionally check one's balance to determine of the portfolio performance is on track towards retirement and other goals. If not, goals may need to be changed or greater contributions may be necessary.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Personal Rate of Return
I do check, just not historical performance.Carpe wrote:Not necessarily.Sidney wrote:Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.McCharley wrote:I find it hilarious that Bolgeheads recommend a set-it-and-forget-it investing strategy -- they're more obsessive than most!
Cheers, Guys -- gotta be one to know one!
Observing any differences between personal return and market return could highlight problems in someone’s investment strategy, which could then be corrected. For example, allowing emotions to interfere with accumulation or withdrawal timing and amounts could easily reduce personal returns. If I remember correctly, Morningstar has made a good point that investor performance generally lags the performance of the funds they invest in. Well there you go, that's why you need to care. Don't always assume you are doing everything correctly, and keep an occasional check things to prevent small problems from becoming big ones.
Weekly I check for fraud.
If there is major movement in markets I check for drift from target allocation.
If movement is down, I check for unrealized losses that should be taken.
I'm all index with tilt. I expect tracking error so finding out that I am "off the line" isn't actionable.
I always wanted to be a procrastinator.