apc12 wrote:Investor return as of 11/30/2015
Since* 1/31/2013 1.83%
* Annual compound return
The investor return is an internal
rate of return; it is really dependent on the precise timing of contributions and withdrawals. It is only useful to you (not to others) as a gauge of how much your money has grown.
In other words, the spreadsheet is saying the following: Your returns are identical to having put all your contributions into (and taken all your withdrawals from)
a fixed-rate savings account with a 1.83% interest rate, assuming the exact same timing
of contributions and withdrawals.
Can you give me a brief summary of what I can interpret from this data, if anything? I'm trying to figure that out by reading it on the wiki but still not sure. It looks to me like I'm not doing very well, but I think this is related to having my money in a stable value fund in 2013 (before I found this blog and learned about what I should be doing, missed lots of growth there) and having all relatively new accounts.
Portfolio returns are useful to compare the returns of your portfolio with a relevant benchmark.
For example, if your portfolio was composed of 50% US stocks, 20% international stocks, 13% emerging markets stocks, and 17% bonds in 2015 (YTD), an appropriate benchmark would be the following weighted average YTD returns of VTI/VXUS/VWO/BND:
(0.5 X 2.48%) + (0.2 X -2.30%) + (0.13 X -13.22%) + (0.17 X 0.80%) = -0.80%
If you find that your portfolio and benchmark returns are not
relatively similar, then you have to find out what went wrong. The first possibility is that you made a mistake when entering your data, like forgetting to include some contributions or withdrawals, or you made a mistake entering the portfolio balance in a month, or you included internal money flows into your contributions or withdrawals. Another possibility is that you did not have a fixed allocation over the period, and thus, the benchmark is not representative and it's normal that returns differ.
The deeper philosophical question still remains. What is this all useful for? I really don't see much use for it, for a three-fund portfolio
investor like me, other than to learn how returns are quite volatile and change from month to month. This helps understand how projecting a fixed rate of return into the future is a futile exercise. How could it not be a futile exercise, when past returns change from month to month?
If you have a tilted portfolio, it could allow you to compare how your tilted portfolio is doing relative to a non-tiled portfolio. Yet, again, maybe that's not useful, as it would be a bad idea to abandon your tilted portfolio just as it goes on sales (e.g. it has lower returns). Buying high and selling low is not really a good investing approach.
Finally, too many people overestimate their returns by looking at the growth of their portfolio balance without taking into consideration contributions (like the Beardstown Ladies
). Or, when they do, they unfairly compare their investor returns (XIRR) to benchmark returns (time-weighted). At least, with the spreadsheet they can easily do a proper comparison of time-weighted portfolio returns to benchmark returns.
Bogleheads investment philosophy |
Lifelong Portfolio: 25% each of (domestic / international) stocks / domestic (nominal / inflation-indexed) long-term bonds |