Performance Returns

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YikesHighFees
Posts: 35
Joined: Mon Jan 22, 2018 5:26 pm

Performance Returns

Post by YikesHighFees » Mon Apr 15, 2019 4:49 am

Hello all,

Can anyone please clarify, in general when an investment reports performance returns on your monthly statement, it typically shows them at '3 Months, or QTR, Year-To-Date, 1 Year, 3 Years, 5 Years, Since Inception.. Hence, if the statement is covering the period 3/1/2019 to 3/31/2019, is it the case that 1 Year is the performance from 3/31/2018 to 3/31/2019 using the account value on (3/31/2019 minus the value on 3/31/2018) divided by the account value on 3/31/2018? Example, On 3/31/2018 value is $100K, on 3/31/2019 value grew to $125K, thus, 25K divided by $100K equals $25K then divided by $100K equals .25 or 25%?

If correct, to do the 3-Year and 5-Year, this process is repeated for EACH year from the calendar dates back 3 years and 5 years then the average taken for those 3 and 5 year data points?

In addition to confirming the formula, I am also interested in knowing the dates to use. So, is it correct if starting with a statement ending 3/31/2019, I would need to look at account values on statements ending 3/31/2018, 3/31/2017, and so on back to 3/31/2014?

When I run the numbers like this, my numbers are about 2% lower than those reported on my statement. I added back advisory fees into the account value that were taken out during each year but did not add back in expense ratio impact.

Thanks to anyone who can follow this and provide some insight! :D

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Performance Returns

Post by livesoft » Mon Apr 15, 2019 6:40 am

I cannot say what your statements actually have, but if one looks at the performance tab at Morningstar.com, then there are two tables. The tables are labelled with the ending date that applies which is either today, yesterday, the end of the previous month, or the end of the previous year. (I now see you have another thread about Morningstar.com performance numbers.)

So you can compare performance on your statement for any investment that you had no transactions (except for automatically reinvested distributions) with the number given at Morningstar.com for the same investment if it has a ticker symbol.

Now the algorithm used to compute performance is the one used by the XIRR() function in a spreadsheet because it takes into account any withdrawals and any contributions. The observed discrepancy that you are seeing could be that you yourself are not using that algorithm, but just dividing ending number by starting number. Here is an example why just doing that dividing is not legitimate:

Example: On January 1, 2019 my portfolio value is $100,000. On March 31, 2019 I add $100,000 to my portfolio. My 3/31/2019 statement shows that I have $200,000 in my account. My performance is not $200K/$100K (end/start). It is zero.

So learn to use the XIRR() algorithm in order to calculate an internal rate of return (performance) when there are transactions being made during the date range.

PS: The expense ratio impact is already included in fund prices and the Morningstar.com performance numbers, but not any front-end loads paid by an investor.

If I use the free downloadable MSMoney software for MS Windows, then it calculates performance numbers using the XIRR() algorithm and matches exactly numbers reported elsewhere. I find this a good way to track my portfolio without using a spreadsheet.
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RickBoglehead
Posts: 2991
Joined: Wed Feb 14, 2018 9:10 am

Re: Performance Returns

Post by RickBoglehead » Mon Apr 15, 2019 7:06 am

YikesHighFees wrote:
Mon Apr 15, 2019 4:49 am
Hello all,

Can anyone please clarify, in general when an investment reports performance returns on your monthly statement, it typically shows them at '3 Months, or QTR, Year-To-Date, 1 Year, 3 Years, 5 Years, Since Inception.. Hence, if the statement is covering the period 3/1/2019 to 3/31/2019, is it the case that 1 Year is the performance from 3/31/2018 to 3/31/2019 using the account value on (3/31/2019 minus the value on 3/31/2018) divided by the account value on 3/31/2018? Example, On 3/31/2018 value is $100K, on 3/31/2019 value grew to $125K, thus, 25K divided by $100K equals $25K then divided by $100K equals .25 or 25%?

If correct, to do the 3-Year and 5-Year, this process is repeated for EACH year from the calendar dates back 3 years and 5 years then the average taken for those 3 and 5 year data points?

In addition to confirming the formula, I am also interested in knowing the dates to use. So, is it correct if starting with a statement ending 3/31/2019, I would need to look at account values on statements ending 3/31/2018, 3/31/2017, and so on back to 3/31/2014?

When I run the numbers like this, my numbers are about 2% lower than those reported on my statement. I added back advisory fees into the account value that were taken out during each year but did not add back in expense ratio impact.

Thanks to anyone who can follow this and provide some insight! :D
The correct answer would come from your investment company.

Clearly, the returns should be for periods through the statement date, so a 3/31/19 statement would show returns to that date for the periods listed, and comparable years would be the same. However, taking your statement balance assumes that you've reinvested dividends and capital gains for everything.

Neither Vanguard nor Fidelity put these types of tables on their statements. Why? Past performance is not indication of future performance.
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Electron
Posts: 1835
Joined: Sat Mar 10, 2007 8:46 pm

Re: Performance Returns

Post by Electron » Tue Apr 16, 2019 5:36 pm

YikesHighFees wrote:
Mon Apr 15, 2019 4:49 am
If correct, to do the 3-Year and 5-Year, this process is repeated for EACH year from the calendar dates back 3 years and 5 years then the average taken for those 3 and 5 year data points?
If the statement is showing historical fund returns, they typically show compound annual returns and also assume reinvestment of all distributions. A compound annual return would be the effective annual return over the full period and is not representative of what happened in any given year. Compound annual returns can be calculated using only the starting and ending values along with the time period.

Any footnotes at the bottom of your statement may provide details on the data presented.

https://www.investopedia.com/terms/c/cagr.asp

You can calculate compound annual returns yourself with a Scientific Calculator by working with exponents. I've done that quite a few times working with the Growth of $10,000 charts provided by Morningstar.
Electron

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