Personal Rate of Return

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
joetaf27
Posts: 22
Joined: Mon Mar 25, 2013 3:58 pm

Personal Rate of Return

Post by joetaf27 »

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?
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Personal Rate of Return

Post by Taylor Larimore »

Joe:

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
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Personal Rate of Return

Post by dbr »

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?
Conventionally that is internal rate of return using the XIRR add-in in EXCEL or an equivalent application.

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.
User avatar
camontgo
Posts: 329
Joined: Tue Oct 27, 2009 1:46 pm
Location: Chicago, IL
Contact:

Re: Personal Rate of Return

Post by camontgo »

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.
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
Topic Author
joetaf27
Posts: 22
Joined: Mon Mar 25, 2013 3:58 pm

Re: Personal Rate of Return

Post by joetaf27 »

Hi Taylor-

What do you mean you use index funds so there is nothing to track?
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Personal Rate of Return

Post by an_asker »

Taylor Larimore wrote:Joe:

I use index funds so there is nothing to track.

Keep investing simple.

Best wishes.
Taylor
One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.
Crow Hunter
Posts: 1054
Joined: Wed Jun 27, 2012 12:05 pm

Re: Personal Rate of Return

Post by Crow Hunter »

joetaf27 wrote:Hi Taylor-

What do you mean you use index funds so there is nothing to track?
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. :wink:
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Personal Rate of Return

Post by Taylor Larimore »

an_asker wrote:
Taylor Larimore wrote:Joe:

I use index funds so there is nothing to track.

Keep investing simple.

Best wishes.
Taylor
One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.
an_asker:

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
Sidney
Posts: 6784
Joined: Thu Mar 08, 2007 5:06 pm

Re: Personal Rate of Return

Post by Sidney »

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.
User avatar
LAlearning
Posts: 1365
Joined: Wed May 09, 2012 12:26 pm
Location: Los Angeles

Re: Personal Rate of Return

Post by LAlearning »

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.
I know nothing!
User avatar
Ice-9
Posts: 1579
Joined: Wed Oct 15, 2008 12:40 pm
Location: MD

Re: Personal Rate of Return

Post by Ice-9 »

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
User avatar
rob
Posts: 5247
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Personal Rate of Return

Post by rob »

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
RNJ
Posts: 863
Joined: Mon Apr 08, 2013 9:06 am

Re: Personal Rate of Return

Post by RNJ »

Taylor Larimore wrote:
I don't need to know my "personal rate of return" (which changes every day). It is what it is.
Is there a "like" button somewhere?
McCharley
Posts: 422
Joined: Tue Apr 12, 2011 5:45 pm

Re: Personal Rate of Return

Post by McCharley »

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! :sharebeer
Sidney
Posts: 6784
Joined: Thu Mar 08, 2007 5:06 pm

Re: Personal Rate of Return

Post by Sidney »

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! :sharebeer
Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.
I always wanted to be a procrastinator.
Carpe
Posts: 211
Joined: Tue Jun 16, 2009 3:38 pm

Re: Personal Rate of Return

Post by Carpe »

Sidney wrote:
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! :sharebeer
Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.
Not necessarily.

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
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Personal Rate of Return

Post by an_asker »

Taylor Larimore wrote:
an_asker wrote:
Taylor Larimore wrote:Joe:

I use index funds so there is nothing to track.

Keep investing simple.

Best wishes.
Taylor
One would still require a mathematical calculation to track one's personal rate of return if inflows/contributions are ongoing.
an_asker:

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
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.
crake
Posts: 275
Joined: Thu Mar 14, 2013 2:12 pm

Re: Personal Rate of Return

Post by crake »

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.
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Personal Rate of Return ?

Post by Taylor Larimore »

crake:
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 happy you find your historical data helpful.

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
Sidney
Posts: 6784
Joined: Thu Mar 08, 2007 5:06 pm

Re: Personal Rate of Return

Post by Sidney »

Carpe wrote:
Sidney wrote:
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! :sharebeer
Not set it and forget it. Just that personal rate of return (historical results) is not the criterion for making changes.
Not necessarily.

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.
I do check, just not historical performance.

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.
Post Reply