Happy fifth birthday! [since the 2008-2009 market crash]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

What are your annualized returns from 3/9/09-3/9/14?

Negative
1
1%
0-10%
10
12%
10-20%
56
66%
20-30%
16
19%
Over 30%
2
2%
 
Total votes: 85

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grabiner
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Happy fifth birthday! [since the 2008-2009 market crash]

Post by grabiner »

It has now been five years since the end of the 2008-2009 market crash, and given many of the posts, investors seem to have forgotten about it. Since it has been exactly five years, the five-year returns are at their highest ever; risk-takers who were able to stay the course have been rewarded for five years for their year of suffering. And compounding is very significant; a 25% annualized return over five years corresponds to a fund tripling in value over those five years. (And the negative compounding is just as significant; one more decline like 2008-2009 would wipe out almost all of those gains. You still need to look at your risk tolerance.)

Your five-year returns should primarily be a measure of how much risk you took (and thus, presumably of how much you lost in 2008-2009), but also of your US/international ratio. Small-cap risk was slightly rewarded in this boom, but not value.

Total Stock Market Admiral 24.00%
Mid-Cap Admiral 27.27%
Small-Cap Admiral 29.19%
Small-Cap Value Admiral 28.20% (extrapolated from 28.02% for Investor shares)

Total International Admiral 17.43% (extrapolated from 17.34% for Investor shares)
International Explorer 22.24%
FTSE All-World Ex-US Small-Cap ~22% (extrapolated by using International Explorer to fill in the missing month, as fund inception was 4/2/09).

REIT Index Admiral 29.53% (behaved like a small-cap stock fund)
Precious Metals and Mining 6.38% (with the recent gold collapse, this is the only fund which did not earn the reward for its risk)

Short-Term Bond Index Admiral 2.89%
Short-Term Investment-Grade Admiral 5.21%
Total Bond Index Admiral 5.05%
Intermediate-Term Bond Index Admiral 7.04%
Intermediate-Term Investment-Grade Admiral 9.42%

High-Yield Corporate Admiral 15.01%

Short-Term Tax-Exempt Admiral 1.39%
Limited-Term Tax-Exempt Admiral 2.66%
Intermediate-Term Tax-Exempt Admiral 5.02%
Long-Term Tax-Exempt Admiral 5.96%
High-Yield Tax-Exempt Admiral 7.42% (not really a high-yield fund)

I made a similar post on the first birthday: Many Happy Returns!, with similar observations; the one-year returns were strongly correlated with risk, but the relation was much more memorable, as the funds which doubled in value in 2009-2010 were the same funds which lost 2/3 of their value in 2008-2009.

(edited to correct fund name)
Last edited by grabiner on Sun Mar 10, 2019 11:15 pm, edited 1 time in total.
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MnD
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Re: Happy fifth birthday!

Post by MnD »

23.47%

80/20 five years ago with equities split roughly 50-50 US and international.
Rebalanced twice back to 80/20 during the 08/09 crash.
I've been on a 1% reduction in equity per year glidepath since then, so now 75/25.

I was quite fired up about equities in Feb 21 2009 thread - "Be greedy when others are fearful" :mrgreen:
http://www.bogleheads.org/forum/viewtop ... 77#p408077
MnD wrote:Despite all the handwringing, doom and gloom by politicians and cable news talking heads, The US and the world aren't going out of business.
The people accumulating equity now are going to be the big winners at the end of the day. I love reading the "I can't stand it any more - I'm selling" posts. Exactly the sort of group-think you want. Just about every uninformed investor and many knowledgable ones I know has gone to cash, and just about everyone has pulled back from buying new shares in their 401-K. Classic signs of a market bottoming. Also - please keep up the "another 50% drop to come according to so and so" type of posts. Every two weeks the mrs. and I we are buying another nice chunk of equity on the cheap from weak hands.
Last edited by MnD on Sun Mar 09, 2014 1:06 pm, edited 1 time in total.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: Happy fifth birthday!

Post by Wildebeest »

MnD wrote:23.47%

80/20 five years ago with equities split roughly 50-50 US and international.
Rebalanced twice back to 80/20 during the 08/09 crash.
I've been on a 1% reduction in equity per year glidepath since then, so now 75/25.
I suffer from number envy. I wish I could figure out my return in percentage points, leave alone double decimals
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Higher returns = Higher risk of loss.

Post by Taylor Larimore »

Grabiner:

I have not computed our portfolio returns for many years. It is enough for me to know that my index funds provided a higher return than the average funds in their category.

At my age (90) I am more concerned with keeping what I've got (higher bond allocation), than taking unnecessary risks hoping for higher return.

Best wishes.
Taylor
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Re: Happy fifth birthday!

Post by iceport »

David,

Is XIRR an appropriate measure, given the fact that I've added significant contributions in the past 5 years? Assuming so, my 5-year XIRR from 3/9/09 to 3/9/14 = 16.83%. (Yes, it's accurate.) The portfolio is more than 3.4 times what it was on March 9, 2009. Throughout the past 4 years or so I've been transitioning from ~70% equities to ~60% equities as I near retirement. (The transition was unrelated to market conditions.)

Thanks for making me look it up. 8-)

To Taylor's point regarding index funds, I should note that I've been 100% passively invested for the entire 5-year duration.

--Peter

EDIT: Actually, the number I pay more attention to is the XIRR since the pre-Great Recession market peak in October, 2007. My XIRR from then to now is 5.79%. I know at least one person who feels fortunate to have bailed out of the market just before the crash. But because this person has never re-entered, he's significantly worse off than he would have been by just staying the course.
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Re: Happy fifth birthday!

Post by tomd37 »

How does one figure annualized returns for these five years when you are in the distribution phase (i.e., RMDs)? I know my balances in March of 2009 and 2014, but I have taken out RMDs during those five years and also invested some of the excess back in a taxable account via the TSM fund.

"a" dollars was my March 2009 balance and "b" dollars is my March 2014 balance. I know I have "c" dollars more now than March 2009. I also know that a net "d" dollars was taken out as RMDs. :?

This old mind is no good at math but my balances continue to grow at the end of each year, so I guess that's good. :moneybag
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by dickenjb »

Well, according to Vanguard's "Personal Performance" tab, I earned 17.9% annually.

But that does not include all my assets, especially my Fidelity 401(k).

My AA pretty much matches VSMGX (LS Mod Gro) which returned 15.47% over the 5 year period ending 2/28/14.

Like Taylor, I have no interest in setting up spreadsheets and calculating my exact return.

Just take what Mr Market gives me, less about 8 bps.
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Re: Happy fifth birthday!

Post by MnD »

Wildebeest wrote:
MnD wrote:23.47%

80/20 five years ago with equities split roughly 50-50 US and international.
Rebalanced twice back to 80/20 during the 08/09 crash.
I've been on a 1% reduction in equity per year glidepath since then, so now 75/25.
I suffer from number envy. I wish I could figure out my return in percentage points, leave alone double decimals
Schwab does 90% of the work and updates XIRR for various time periods including 5 years every day including across all accounts.
I have one 401-K outside Schwab and that was set up in an XIRR spreadsheet a long time ago.
I usually run that outside one just once a year, but I was curious about the 5-year from the bottom figure.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by sscritic »

XIRR doesn't give you five year returns, it gives you one week returns, one month returns, three month returns, and returns from every time you invested in the last 1825 days (I know there is at least one leap year in there, so this won't go all the way back to five years ago).

If you want to know what happened to your holdings from five years ago, you have to isolate them from everything else. At least that's what I understand five year returns to be. When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by chaz »

I'm up 20.5%.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by BlueEars »

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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by MnD »

sscritic wrote:If you want to know what happened to your holdings from five years ago, you have to isolate them from everything else. At least that's what I understand five year returns to be. When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments.
Schwab does provide 5 year returns and gives a choice of personal rate of return or time weighted return.

Personal rate of return:
Benchmarks are cash flow adjusted meaning the benchmark returns above were calculated as if you made the same deposits and withdrawals in the benchmark you actually made in the portfolio. This allows the benchmark return to reflect the return you would have received had you invested in that benchmark rather than in your portfolio.
Personal Rate of Return (also known as an Internal Rate of Return)-This return methodology is used to measure the actual performance return of an account, portfolio or security, including the impact of the timing and size of deposits and withdrawals (use the Time-Weighted Return for a calculation methodology which excludes the impact of deposits and withdrawals). The return calculation includes dividends, interest, accrued income (for fixed income positions) and fees (for Schwab Private Client, Managed Account Select and Schwab Managed Portfolios). This methodology is commonly used when determining the actual return of an account or portfolio; keeping in mind the return will be impacted by the amount and timing of your withdrawals and deposits and may not reflect the actual return of your manager, advisor or underlying securities.

Time weighted return
Performance calculations are performed using the Daily Time Weighted Rate of Return (DTWR) Calculation method. Time-Weighted Return-This return methodology is used to measure the performance of your account, portfolio or security, unaffected by the timing and size of deposits and withdrawals (use the Personal Rate of Return for a calculation methodology which includes the impact of deposits and withdrawals). The return calculation includes dividends, interest, accrued income (for fixed income positions) and fees (for Schwab Private Client, Managed Account Select, Managed Account Connection, and Schwab Managed Portfolios). This methodology is commonly used when evaluating the performance of an advisor or manager or the actual performance of the underlying securities in an account or portfolio.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Cosmo »

I am not presently a market timer but in the past, I have messed up trying "to beat the market" by purchasing and selling individual stocks. However, while I was in the process of "staying the course" and diligently maintaining my asset allocation during the Great Recession, my second kid was born prematurely early in 2009. A very stressful time to say the least so the least of my worries at the time was the stock market. By the time things started improving with my second son and he was released from the hospital, I finally went ahead and opened up a Vanguard 529 plan with a fairly large lump sum from his grandparents and myself. It wasn't until the end of the 2009 when I realized when this money first hit his account: March 9th, 2009. I couldn't have "timed" that better myself, eh?
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by LAlearning »

Who had a negative return?!
I know nothing!
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by zaboomafoozarg »

LAlearning wrote:Who had a negative return?!
I was gonna say probably somebody who's 100% in gold, but even gold is up 40% total over the past 5 years.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by nisiprius »

All well and good, but I still say 25%/year rising from the foothills is a lot more fun than 25%/year climbing out of Death Valley.

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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Christine_NM »

I guess you've covered the past 5 years. It's nice, but sorry, not a big deal in the long run.

I can only look at 12/2010 to 3/2014 without dragging out old backups. What struck me was not the percentage, but the amount.

In less than 4 years my portfolio has increased just about $500,000 on the nose. But I recall vividly that it took from 1965 to 1999 to save/invest the first $500,000.

So stay focused on the long run, and the numbers will be even more amazing. Edit: Sorry to be such a wet blanket.
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Re: Higher returns = Higher risk of loss.

Post by grabiner »

Taylor Larimore wrote:I have not computed our portfolio returns for many years. It is enough for me to know that my index funds provided a higher return than the average funds in their category.
I don't calculate mine either, although I could get an XIRR in Quicken without too much trouble. I know what I hold and can look up the return of all my funds, so my overall return should be in the low 20's over the last five years (90% stock, overweighting small-cap, half international).
At my age (90) I am more concerned with keeping what I've got (higher bond allocation), than taking unnecessary risks hoping for higher return.
And I agree with that. There isn't a right amount of risk to take for everyone, and your portfolio shouldn't be anything like mine because your risk tolerance doesn't match mine. I took the risks and lost 60% of my portfolio in 2007-2009, then kept the same risk level on the way back up.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by iceport »

sscritic wrote:XIRR doesn't give you five year returns, it gives you one week returns, one month returns, three month returns, and returns from every time you invested in the last 1825 days (I know there is at least one leap year in there, so this won't go all the way back to five years ago).

If you want to know what happened to your holdings from five years ago, you have to isolate them from everything else. At least that's what I understand five year returns to be. When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments.
Could you explain the limitation of the XIRR function a bit more? Is it a limitation of the computational method? Is it a limitation of the algorithm used by Excel or OpenOffice Calc? Maybe it's related to the existence of leap years, which has been known to affect the accuracy of the function in Excel?

I've been keeping a running tab on my XIRR for many years now. As the period spanned by the computation lengthened beyond 5 years, I don't recall any unusual discontinuity in the results. They still seem to make sense. Are you saying they are just not accurate, or that the entire exercise is completely invalid for periods greater than 5 years?

I had never heard this before.

--Peter
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Toons »

Very/thankful for what Mr Market has given me the last 5 years :happy
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by rr2 »

From XIRR, 12.22% (*)

(*) The closest date for which I have reported balances is 1Q2009 (03/31/2009). However, most of the contributions have come after that date.

Portfolio is roughly 60% Stocks.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by FrugalInvestor »

About 13% with approximately 50/50 AA.
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Re: Happy fifth birthday!

Post by pshonore »

tomd37 wrote:How does one figure annualized returns for these five years when you are in the distribution phase (i.e., RMDs)? I know my balances in March of 2009 and 2014, but I have taken out RMDs during those five years and also invested some of the excess back in a taxable account via the TSM fund.

"a" dollars was my March 2009 balance and "b" dollars is my March 2014 balance. I know I have "c" dollars more now than March 2009. I also know that a net "d" dollars was taken out as RMDs. :?

This old mind is no good at math but my balances continue to grow at the end of each year, so I guess that's good. :moneybag
Just do an XIRR calc in Excel.

Code: Select all

10.08%		
3/9/2009	500000	Beg Bal  "a"
12/1/2010	-20000	RMD 1
12/1/2011	-22000	RMD 2
12/1/2012	-24000	RMD 3
12/1/2013	-26000	RMD 4
3/9/2014	-700000	End Bal "b"
First line is beginning balance, then 4 annual RMDs and then ending balance. Note signs and of course you can put in the correct date for RMDs as necessary and additional RMDs as well

XIRR formula is =XIRR(value range,date range) and using my made up numbers equal 10.08%
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by gkaplan »

Oops. I mistakenly chose the wrong option. Also, I was basing my five year return from 12/31/2008 to 12/31/2013, since I only compute my returns at the end of each quarter.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by red5 »

15%......active investing up to 2012, been indexing since 2012.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by kenyan »

I was just starting to ramp up my savings rate in early 2009, and had very little saved at that time. As a result, my 5-year (estimated from Vanguard, which isn't all of my assets) isn't that great comparatively (~15%), since the bulk of my money didn't see that 60% gain from March until year end 2009. However, in terms of retirement account growth, I'm up about 1500%, or a CAGR of 171% including contributions :happy . I'll take that.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Sheepdog »

This is not your requested dates, but close enough?. My 5 year average rate of return from 1/1/2009 to 12/31/2013 was 8.5% with an allocation averaging 24% stock. I want to stay ahead of my 4.5% average withdrawal, which I happily did with enough extra to have paid for my 2008 losses and with possibly enough gain to take me through the next downturn :?: (There's no wishful thinking emoticon.).
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Garco »

18.5% 5-year annualized rate for me (excluding my contributions from salary -- if those are included it's 19.6%).

However, I prefer to reckon my gain from mid-October 2007, when my portfolio was at peak, rather than from March 9 when it was at bottom of the trough. I do pretty well from the mid-October peak, too. But there's nothing better than a market bottom 5 years ago to make me look smart 5 years later....
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Ice-9 »

I don't have a quick and easy way to calculate the return of my portfolio by itself, but I may check those numbers later for the fun of it.

However, I do keep a Google spreadsheet with monthly entries of my entire net worth (including bank accounts and home equity) and contributions made to net worth (either saving/investing or additional mortgage payments to principal.) Plugging those numbers into this calculator, I get an annual return of 13.13% since 3/9/2009.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by pshonore »

petrico wrote:
sscritic wrote:XIRR doesn't give you five year returns, it gives you one week returns, one month returns, three month returns, and returns from every time you invested in the last 1825 days (I know there is at least one leap year in there, so this won't go all the way back to five years ago).

If you want to know what happened to your holdings from five years ago, you have to isolate them from everything else. At least that's what I understand five year returns to be. When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments.
Could you explain the limitation of the XIRR function a bit more? Is it a limitation of the computational method? Is it a limitation of the algorithm used by Excel or OpenOffice Calc? Maybe it's related to the existence of leap years, which has been known to affect the accuracy of the function in Excel?

I've been keeping a running tab on my XIRR for many years now. As the period spanned by the computation lengthened beyond 5 years, I don't recall any unusual discontinuity in the results. They still seem to make sense. Are you saying they are just not accurate, or that the entire exercise is completely invalid for periods greater than 5 years? I had never heard this before.

--Peter
I'm not aware of any limitations. However, do be aware the return will be "annualized". If you invest $1000 on 1/1 and it grows to 1050 on 7/1 it will yield an IRR of approx. 10% even though you got a return of about 5% during the period. And just so there's no confusion, if you do not account for ALL withdrawals and additions during the period, you will have a bogus number
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Doc »

pshonore wrote:I'm not aware of any limitations. However, do be aware the return will be "annualized". If you invest $1000 on 1/1 and it grows to 1050 on 7/1 it will yield an IRR of approx. 10% even though you got a return of about 5% during the period. And just so there's no confusion, if you do not account for ALL withdrawals and additions during the period, you will have a bogus number
From Excel XIRR
Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. To calculate the internal rate of return for a series of periodic cash flows, use the IRR function.
There are a few limitations but I think they can all be worked around. eg. "XIRR expects at least one positive cash flow and one negative cash flow; otherwise, XIRR returns the #NUM! error value."

http://office.microsoft.com/en-us/excel ... 62387.aspx
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by technovelist »

How about 10 year returns? :)
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by technovelist »

zaboomafoozarg wrote:
LAlearning wrote:Who had a negative return?!
I was gonna say probably somebody who's 100% in gold, but even gold is up 40% total over the past 5 years.
Right; that can't be the explanation. It would take very bad timing to have a negative return when everything is up!
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by livesoft »

I have kept good records over the years. I have several major positions where there have been no transactions since March-April 2009 when I tax-loss harvested into them. These include a Vanguard Large-Cap Index fund, a Vanguard Small-cap Value Index fund, a Vanguard FTSE all-world ex-US large-cap fund, and the iShares EAFE small-cap index fund. Their dvidends have been taken in cash and the cash spent or invested elsewhere. Unremarkably, except for the fact that their dividends have not been reinvested, their returns have matched the indexes which is trivial to do since there have been no transactions.

Of course, the biggest disappointment for me has been the TIAA Real Estate account. :annoyed
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by pshonore »

Doc wrote:
pshonore wrote:I'm not aware of any limitations. However, do be aware the return will be "annualized". If you invest $1000 on 1/1 and it grows to 1050 on 7/1 it will yield an IRR of approx. 10% even though you got a return of about 5% during the period. And just so there's no confusion, if you do not account for ALL withdrawals and additions during the period, you will have a bogus number
From Excel XIRR
Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. To calculate the internal rate of return for a series of periodic cash flows, use the IRR function.
There are a few limitations but I think they can all be worked around. eg. "XIRR expects at least one positive cash flow and one negative cash flow; otherwise, XIRR returns the #NUM! error value."

http://office.microsoft.com/en-us/excel ... 62387.aspx
I usually put in starting value or inflows as a positive, and withdrawals or ending values as a negative.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Doc »

livesoft wrote:I have kept good records over the years. I have several major positions where there have been no transactions since March-April 2009 when I tax-loss harvested into them. These include a Vanguard Large-Cap Index fund, a Vanguard Small-cap Value Index fund, a Vanguard FTSE all-world ex-US large-cap fund, and the iShares EAFE small-cap index fund. Their dvidends have been taken in cash and the cash spent or invested elsewhere. Unremarkably, except for the fact that their dividends have not been reinvested, their returns have matched the indexes which is trivial to do since there have been no transactions.

Of course, the biggest disappointment for me has been the TIAA Real Estate account. :annoyed
Interesting example of using an IRR calculation like XIRR to evaluate performance.

My Vanguard RE fund has had a five year IRR of almost 40% - hardly disappointing. Why the difference? Because according to my IPS I started dollar cost averaging out of the fund in 2010 so I got more benefit from the early runup than livesoft did.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by placeholder »

No idea what the rate is since I don't care but from 11/2007 to present the portfolio has approximately doubled (includes new contributions and growth).
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LH
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by LH »

XIRR

the best way to think of it is a "black box"

1) things that happen inside the box, dividends, buying and selling with money already in the account, that doesnt leave the account, coupons, etc etc - do not count and are not listed

2) things that happen outside the box - money going into the box, or money coming out of the box.

The beauty of Internal rate of Return, is thats its only money taken into or out of the account (or accounts, or portfolio) that matters.

So anytime you put in new money, its a line item in an XIRR calculation with date and amount in. anytime you take money out, its a line item with a date and a negative number.

To do an XIRR calculation, you just have all the money in, and out, with dates, then you take todays date, and ALL the money in the account, cash, stock worth, bonds worth, etc, and act like you are taking it out today, you put todays date, and a negative sign in front of the total account worth, and then run XIRR function, and it tells you the interest rate, had you put in/taken that money out on those dates, into a bank account. So an XIRR of say 6.7 percent, means if you had put in/taken out money on the exact same dates into a bank account that bears 6.7 percent interest, you would have the same money you have in your actual account.
'
Note its easy to screw up XIRR. Mainly by forgetting to put money in the XIRR calculation, that was put into the account. This results in higher returns than actually received. This is what the beardstown ladies did, put in money, but did not account for it, creating thier false great returns that they wrote a book about, and became famous and now infamous for.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by madsinger »

I just collected up my data. Much to my surprise, my 5 year XIRR from March 8, 2009 to March 7, 2014 is 24.44%. I was rebalancing throughout, so in February 2009, I had purchased quite a bit of stocks (which had fallen a lot). Also, my precious metals XIRR is much higher than the return of the PM fund by itself, due to a bunch of selling while it was rising quickly (and some unfortuitous buying this past year...although it is up rather smartly so for in 2014). Also, in the past five years, I have lowered my stock percentage of my AA about 5 percentage points, and they were at their highest, right at the beginning of the run.

This only strengthens my resolve of "pick an AA that is right for me, keep adding to the portfolio, and rebalance" (I rebalance more often than most books say, but I honestly think that is my way of feeling "hands on" on my decidedly "hands off" portfolio).

-Brad.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by iceport »

pshonore, Doc and LH: you have described the XIRR function as I know it, thanks. The dollar-weighted return (XIRR) is the only meaningful measure of annualized returns I know of when there have been withdrawals from and/or contributions to a portfolio. I'm still confused by sscritic's comments, as he's not usually wrong.

--Peter
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by madsinger »

sscritic wrote:XIRR doesn't give you five year returns, it gives you one week returns, one month returns, three month returns, and returns from every time you invested in the last 1825 days (I know there is at least one leap year in there, so this won't go all the way back to five years ago).

If you want to know what happened to your holdings from five years ago, you have to isolate them from everything else. At least that's what I understand five year returns to be. When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments.
petrico wrote:I'm still confused by sscritic's comments, as he's not usually wrong.

--Peter
First, I agree that ssscritic is not usually wrong!

The XIRR function (internal rate of return) does find the "one" [caveat] rate of return that if applied to all inflows and outflows would result in the actual rate of return of a portfolio. Two caveats...sometimes, for "strange" input, you can find more than one solution to this equation (it is a large polynomial equation with many potential answers), and two, the actual returns of each inflow are almost never the internal rate of return. Each investment chunk has its own rate of return, the XIRR is only an aggregate number that solves the big equation.

I think sscritic's comment that "When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments", he is referring to the "performance charts" on the Vanguard page. However, if you are logged onto your account and ask for your personal rate of return, Vanguard does use an internal rate of return calculation like XIRR. From the Vanguard website:

"Calculation method. Personal performance uses a formula called internal rate of return (IRR), which is a dollar-weighted return. IRR takes into account new money coming into your investment, as well as how long that money has been held. Don't confuse your personal rate of return with those posted for funds and indexes. The returns presented in these instances use a time-weighted calculation, which does not take cash flow into consideration."

If you have further questions about XIRR, ask away. I can blather about it for hours!

-Brad
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Doc »

madsinger wrote: ...


The XIRR function (internal rate of return) does find the "one" [caveat] rate of return that if applied to all inflows and outflows would result in the actual rate of return of a portfolio. Two caveats...sometimes, for "strange" input, you can find more than one solution to this equation (it is a large polynomial equation with many potential answers), and two, the actual returns of each inflow are almost never the internal rate of return. Each investment chunk has its own rate of return, the XIRR is only an aggregate number that solves the big equation.

I think sscritic's comment that "When Vanguard tells you what your five year return in a fund is, they add dividends and capital gains, but not new investments", he is referring to the "performance charts" on the Vanguard page. However, if you are logged onto your account and ask for your personal rate of return, Vanguard does use an internal rate of return calculation like XIRR. From the Vanguard website:

"Calculation method. Personal performance uses a formula called internal rate of return (IRR), which is a dollar-weighted return. IRR takes into account new money coming into your investment, as well as how long that money has been held. Don't confuse your personal rate of return with those posted for funds and indexes. The returns presented in these instances use a time-weighted calculation, which does not take cash flow into consideration."

-Brad
Brad, please keep up the blather.

XIRR Caveats:

1) The polynomial is problem is correct. It has to do with the algorithm used to solve the equation. If your initial guess is way wrong the algorithm can sometimes come to the "wrong" answer. In ancient times it was common practice to run the calculation with several initial guesses to ensure that your answer was stable. I think with greater computer power this problem is less of an issue.

2) "Each investment chunk has its own rate of return." Not really. This idea comes from investor's concern with future values. The XIRR formula is actually based on the setting the net present value to zero. This eliminates the assumption of reinvestment of cash flows at the "aggregate" rate but since the common practice in investing is to use only a single rate the present value vs. future value question is mute because you get the same answer.

Intermediate cash flows:

Reinvestment of dividends or not makes no difference in the IRR. (See 2) above. The difference between personal returns and reported fund returns comes from capital going into or out of the investment. Morningstar addresses this aspect with their "investor return" metric. A difference of 2% (from memory) is not unusual.
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madsinger
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by madsinger »

Doc wrote: (...)
2) "Each investment chunk has its own rate of return." Not really. This idea comes from investor's concern with future values. The XIRR formula is actually based on the setting the net present value to zero. This eliminates the assumption of reinvestment of cash flows at the "aggregate" rate but since the common practice in investing is to use only a single rate the present value vs. future value question is mute because you get the same answer.

Intermediate cash flows:

Reinvestment of dividends or not makes no difference in the IRR. (See 2) above. The difference between personal returns and reported fund returns comes from capital going into or out of the investment. Morningstar addresses this aspect with their "investor return" metric. A difference of 2% (from memory) is not unusual.
Perhaps I chose my words poorly. What I mean is that each investment you make may have its own return (hmmmm....maybe I didn't choose my words badly!) For example, if there was a mutual fund whose NAV on Dec 31, 2019, Dec 31, 2010, and Dec 2011 was 20.00, 25.00, 26.00, and an investor bought $1000 worth on Dec 31, 2009 (50 shares at 20.00) and $1000 worth on Dec 31, 2010 (40 shares at 25.00), what was the internal rate of return on Dec 31, 2011?

On the first "chunk", the investment grew from $1000.00 to $1300.00 in two years, =1.3^(1/2)-1 = 14.018% "internal rate of return". The second chunk grew from $1000.00 to $1040.00 in one year, or a return of 4%.

For the whole investment, we want to find:

(1+x)^2 * $1000 + (1+x) * $1000 = $2340

x = .10945, or an internal rate of return of 10.945%

So, each chunk had its own rate of return (14.018% and 4%), but the one* number that satisies the equation is .10945, or an XIRR of 10.945%. (the asterisk here, because there is another number that solves this quadratic equation, but it is not "meaningful" for our purposes).

As for reinvestment of dividends or not, it does make a difference. A dividend paid out from a mutual fund is "withdrawal" from the portfolio. A reinvestment is an investment in the portfolio. From an XIRR point of view, if you revinest the dividend, then the "withdrawal" and "investment" effectively cancel each other out. Another example:

A mutual fund starts the year with an NAV of $10.00. One year later, on Dec 31 of that year, the NAV rises to $11.00, and the fund pays out a $1.00 dividend, and this drops the NAV back to $10.00. By the end of the second year, the fund's NAV has dropped to $9.50. What is the internal rate of return with the dividedn reinvested, and what is it without?

"With"
12/31/2009 $1000.00 (investor buys 100 shares at $10.00 per share)
12/31/2010 ($100.00) (fund pays out dividend)
12/31/2010 $100.00 (investor reinvests dividend, buys 10 more shares at 10.00)
12/31/2011 ($1045.00) (investor has 110 shares at $9.50/ share)

XIRR gives 2.225%

Note that you get exactly the same result if you "leave out" the reinvested dividend.

12/31/2009 $1000.00 (investor buys 100 shares at $10.00 per share)
12/31/2011 ($1045.00) (investor has 110 shares at $9.50/ share)

XIRR gives 2.225%

Now, let's run the calculation without revinvestment:

12/31/2009 $1000.00 (investor buys 100 shares at $10.00 per share)
12/31/2010 ($100.00) (fund pays out dividend)
12/31/2011 ($950.00) (investor has 100 shares at $9.50/ share)

XIRR gives 2.596%

Our investor has a higher internal rate of return, because there was no "reinvestment" of the $100 that would have lost value in year 2.

So, while the oft quoted "XIRR does not care about dividend reinvestment" is true in that if you reinvest dividends, you don't "need" to include that (as shown in the example). But, if you do not re-invest your dividends, you should count that as a withdrawal, and it will change your internal rate of return (for better or worse, depending on the future return of the investment).

-Brad.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Doc »

Brad, Don't use words. They confuse the brain.

The basic IRR equation sets the net present value to zero and calculates the discount rate - IRR.

From Microsoft Office support for Excel's XIRR function:

Image

http://office.microsoft.com/en-us/excel ... 62387.aspx

Each cash flow is treated essentially as a zero coupon bond (bought or sold). The bond is not reinvested. The IRR is the discount rate at the beginning of the period not at the end. If you make the assumption that the discount rate does not change over time the IRR calculation from either the present value or future value formulation gives the same result. Investors are most interested in how much money they are going to have sometime in the future and therefore they like the future value formulation but that opens the question of which rate to use in 2019 which leads to all the detail that you discuss but in reality only confuses the issue and doesn't us give any more useful information.

A problem with IRR is that the future rate of course changes and the further out you go the more uncertain the estimate becomes. A way around this is to reverse the dependent and independent variables in the equation. Assume a rate ("hurdle" rate) that you want and calculate the net present value. This has the advantage of making the estimates less important as you go out in time because of the discounting and it allows you to compare alternatives with different total capital investments. Of course this is impractical and probably irrelevant for what we as investors in stocks and bonds are trying to achieve. :(
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by YDNAL »

grabiner [OP] » Sun Mar 09, 2014 2:32 pm wrote:I made a similar post on the first birthday: Many Happy Returns!, with similar observations; the one-year returns were strongly correlated with risk, but the relation was much more memorable, as the funds which doubled in value in 2009-2010 were the same funds which lost 2/3 of their value in 2008-2009.
What transpired the last 4 calendar years is phenomenal, but for 11 of 15 years, Vanguard S&P 500 VFINX just broke even.
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    2. Investing for retirement is a marathon (not a sprint).

    Code: Select all

    Year	Total Return	$10,000.00
    1999	 21.07%	     $12,107.00
    2000	 -9.06%	     $11,010.11
    2001	-12.02%	      $9,686.69
    2002	-22.15%	      $7,541.09
    2003	 28.50%	      $9,690.30
    2004	 10.74%	     $10,731.04
    2005	  4.77%	     $11,242.91
    2006	 15.64%	     $13,001.30
    2007	  5.39%	     $13,702.07
    2008	-37.02%	      $8,629.56
    2009	 26.49%	     $10,915.53
    2010	 14.91%	     $12,543.04
    2011	  1.97%	     $12,790.14
    2012	 15.82%	     $14,813.54
    2013	 32.18%	     $19,580.53
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Imperabo »

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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by Imperabo »

LAlearning wrote:Who had a negative return?!
You ever seen an ad or a "guru" talking about how a smart investor makes money either in bull or bear markets? Well, the people who lost money are the "smart" ones who thought they could tell what kind of market they were in.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by MGBGTV8 »

I had a 22.9% return over 5 years, according to the Vanguard Personal Performance tool.

This is exactly why VG needs to give us a longer time frame to judge our performance. 5 years isn't enough to show how "buy and hold" really works in a systematic investment scheme many of us use to DCA via our 401k/403b/IRA or taxable account.

March 2009 starting balance- call it 1.00X salary-
Current Balance- 5.17X salary

So how much gain (2.80X salary) was driven by previous or ongoing systematic investments riding out the low as opposed to the 1.37X salary that was added to the account?

The 10-year performance would give me more insight. Short of entering every periodic investment into a separate piece of software, what else can we ask for or do for ourselves? Would the Financial Planner that VG provides with Voyager Select be able to show me this info?

Disclaimer- I am >95% stocks/fixed income.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by madsinger »

Doc wrote:Brad, Don't use words. They confuse the brain.

The basic IRR equation sets the net present value to zero and calculates the discount rate - IRR.

From Microsoft Office support for Excel's XIRR function:

Image

http://office.microsoft.com/en-us/excel ... 62387.aspx
Hi Doc,

I use internal rate of return as a "backward looking measure" to compare returns with other investments. If we know that VFINX returned 23.60% in the past five years, and VBINX 16.72% (according to Morningstar), and I'm wondering "how did I do against those returns?". I could try to find the portfolio returns for each interval between investments and withdrawals, or I could compute an internal rate of return. I choose the latter, because I that is the easiest for me, given the data I have chosen to keep. I believe this gives me a value that has "some meaning" for comparison, but certainly has its flaws, and has no predictive value. Since this thread asked "how did you do in the past five years?" and the poll gave choices of "returns", this is what I chose.

It's clear to me that you understand what an internal rate of return calculation is and what it isn't. My goal is to help people who don't understand this so well.

-Brad.
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Re: Happy fifth birthday! [since the 2008-2009 market crash]

Post by letsgobobby »

I have no idea my returns over that period... but enough to be ahead of pace for very early partial retirement. What a gift. I keep dialing back stock exposure to manage risk but the stock market keeps going up.
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