There will likely be a thread or two on portfolio returns in 2009, but I think its important to distinguish between the two measures of returns often used.
- (i) Dollar Weighted Returns, commonly referred to on the forum as “XIRR” and
(ii) Time weighted Returns, commonly calculated using the Modified Deitz methodology.
Here’s an example, taking a portfolio 100% invested in the MSCI US Broad Market (Vanguard Total Stock Market) this year. The return of the MSCI US Broad Market Index YTD is 30.1% (The underlying index is taken for illustration as monthly return data are easily accessible for this simple example). Few points:
- (i) Time-weighted estimates (e.g. using the Modified Deitz approach) will be the same as the Index returns e.g. 30.1%
(ii) Dollar weighted return estimates (XIRR) will only equal 30.1% if there are no savings/additional investments or withdrawals during the year. And will be higher or lower dependent on the size and timing of additional investments, withdrawals, and the distribution of returns over the year.
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A few examples: assuming a portfolio of $100,000 at the start of 2009 all invested in a US Total Stock Market Portfolio.
Time-weighted Dollar-weighted
(Modified-Deitz) (XIRR)
No savings/withdrawals 30.1 30.1
Saving $1000 at start of each month 30.1 31.2
Saving $5000 at start of each month 30.1 34.6
Withdrawing $1000 at start of each month 30.1 28.9
Withdrawing $5000 at start of each month 30.1 21.7
Assuming poor returns (Jan-Feb 2009), occurred at the end of year, (Nov-Dec 2009), not at the beginning (Jan-Feb changed with Nov-Dec) :
Saving $1000 at start of each month 30.1 28.2
Saving $5000 at start of each month 30.1 22.4
Withdrawing $1000 at start of each month 30.1 32.2
Withdrawing $5000 at start of each month 30.1 44.3
At least my understanding.
Robert
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