Author Topic: how to determine %return on investments without including contributions  (Read 2113 times)

HAPPYINAZ

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Hello,

I am wondering how most people calculate investment returns....do you tend to include the value of contributions made to the acct (say $6500 for an tIRA) or do you somehow exclude those?  I normally look at the value of the acct at the beginning of the year, then at the end of the year and calculate a % return.  But that % return can be dramatically affected by the amount of contributions made during the year.  For instance, if you have an investment acct valued at 200K and make a $6000 contribution, then you have increased it's value by 3%.....if your regular stock investing returns the sp500 return for 2017, and then you have that 3% contribution on top of that...won't it appear like you have beaten the market by 3%?  Sorry if this is a simple question, but it perplexes me.  Thanks for your help.



frugledoc

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Hello,

I am wondering how most people calculate investment returns....do you tend to include the value of contributions made to the acct (say $6500 for an tIRA) or do you somehow exclude those?  I normally look at the value of the acct at the beginning of the year, then at the end of the year and calculate a % return.  But that % return can be dramatically affected by the amount of contributions made during the year.  For instance, if you have an investment acct valued at 200K and make a $6000 contribution, then you have increased it's value by 3%.....if your regular stock investing returns the sp500 return for 2017, and then you have that 3% contribution on top of that...won't it appear like you have beaten the market by 3%?  Sorry if this is a simple question, but it perplexes me.  Thanks for your help.

I find it too much hassle so don't bother.  I prefer to just track over all net worth.

You would also have to track reinvested dividends and separate them from top ups.

boarder42

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((ending account value) - (starting account value) - (contributions))/(starting account value)

(150k - 130k - 10k) / 130k = 7.69%




HAPPYINAZ

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((ending account value) - (starting account value) - (contributions))/(starting account value)

(150k - 130k - 10k) / 130k = 7.69%

thanks.  yes, in a simplistic way that accounts for some of it.  But if you made your contribution at the beginning of the year and the value of assets purchased with those contributions increased in value and paid dividends, then it's a bit complicated to figure out what your return is without the influence of the contributions during the year.   I guess there is no easy way to do this?  I just wondered how others do comparisons of performance of their accts against the sp500 index, when the index doesn't get contributions (other than reinvestment of dividends).  If your your percent return is the same as the sp500index and yet you made contributions equivalent of 3% of the acct value, are you then underperforming the index by 3%?  How do you guys think about this when comparing your investment performance to an index?


Radagast

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Your account has a history of transaction amounts and dates. Download it or copy it into LibreOffice. Use XIRR function with today's date and (-)account value at the top. Compare with the same allocation in Portfolio Visualizer and monthly contributions if you want to compare to something.

My investment flows are pretty lumpy so this doesn't work precisely. A lot of my money went in near the 2016 low and during Brexit low, so I am outperforming my benchmark by 1% or so.

The_Dude

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I use XIRR and include contribution activity when I want to see my own true performance. 

boarder42

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((ending account value) - (starting account value) - (contributions))/(starting account value)

(150k - 130k - 10k) / 130k = 7.69%

thanks.  yes, in a simplistic way that accounts for some of it.  But if you made your contribution at the beginning of the year and the value of assets purchased with those contributions increased in value and paid dividends, then it's a bit complicated to figure out what your return is without the influence of the contributions during the year.   I guess there is no easy way to do this?  I just wondered how others do comparisons of performance of their accts against the sp500 index, when the index doesn't get contributions (other than reinvestment of dividends).  If your your percent return is the same as the sp500index and yet you made contributions equivalent of 3% of the acct value, are you then underperforming the index by 3%?  How do you guys think about this when comparing your investment performance to an index?

What I said works you may have to add divendends to the top if you don't drip them but it will calculate exactly what you're looking for on any time frame your trying to calculate. Doesn't matter when the investment goes in during that time frame.

dbm

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((ending account value) - (starting account value) - (contributions))/(starting account value)

(150k - 130k - 10k) / 130k = 7.69%

thanks.  yes, in a simplistic way that accounts for some of it.  But if you made your contribution at the beginning of the year and the value of assets purchased with those contributions increased in value and paid dividends, then it's a bit complicated to figure out what your return is without the influence of the contributions during the year.   I guess there is no easy way to do this?  I just wondered how others do comparisons of performance of their accts against the sp500 index, when the index doesn't get contributions (other than reinvestment of dividends).  If your your percent return is the same as the sp500index and yet you made contributions equivalent of 3% of the acct value, are you then underperforming the index by 3%?  How do you guys think about this when comparing your investment performance to an index?

You're right in that it doesn't work out the performance based on the time your contribution was in the portfolio.  It's a good way to get your total return for the period and should work fine if you're not making large lumpy contributions.

 If you want to get a bit more serious, and have semi-decent excel skills you can easily build yourself a time weighted performance spreadsheet.  Works a lot easier if cash is included the portfolio value.

To do this, simply get the daily value of your portfolio, and calculate the daily return adjusted for each contribution or withdrawal, and at the end of the period just sum the daily returns.  If your cash account is included then no need to worry about dividends as they either DRP or increase the value of the cash account.  I include dividends separately so I can split returns between capital and income.  If you don't have the cash account included, you would either capture the dividend in a separate column or treat a cash dividend as a withdrawal, as it is leaving the portfolio.

It's a pain the arse to setup, but works well with a couple of copy and paste of transactions and stock prices.  But I like playing around with spreadsheets, so if you don't you might not want to spend the time.

And if you including dividends and want to compare to a benchmark, ensure you use an accumulation or total return index...

Cheers

Interest Compound

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Hello,

I am wondering how most people calculate investment returns....do you tend to include the value of contributions made to the acct (say $6500 for an tIRA) or do you somehow exclude those?  I normally look at the value of the acct at the beginning of the year, then at the end of the year and calculate a % return.  But that % return can be dramatically affected by the amount of contributions made during the year.  For instance, if you have an investment acct valued at 200K and make a $6000 contribution, then you have increased it's value by 3%.....if your regular stock investing returns the sp500 return for 2017, and then you have that 3% contribution on top of that...won't it appear like you have beaten the market by 3%?  Sorry if this is a simple question, but it perplexes me.  Thanks for your help.

What you're looking for is the Time-Weighted return, as opposed to the Money-Weighted return.

Use this easy calculator to determine your Time-Weighted return for any time period:

https://www.rateofreturnexpert.com/time-weighted-return-calculator/

HAPPYINAZ

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Thanks everyone, I appreciate all the replies!  I like messing around with spreadsheets so I will try and set some of this up to be calculated in my current spreadsheet.  And thanks for the link to the timeweighted calculator...that's perfect :)

Am I correct in thinking that most people don't take into account the contributions they make during the year when they report their %returns (ie, most people just calculate % return based on beginning and ending value of their investment portfolio without separating out contributions)?
« Last Edit: April 24, 2018, 02:11:35 PM by HAPPYINAZ »

MDM

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Re: how to determine %return on investments without including contributions
« Reply #10 on: April 24, 2018, 02:18:10 PM »
You might find Calculating personal returns - Bogleheads interesting.

boarder42

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Re: how to determine %return on investments without including contributions
« Reply #11 on: April 24, 2018, 02:49:11 PM »
your ROI doesnt include your contributions.  most financial institutions calculate this for you Vanguard and Principal the 2 sites i use do this.

Radagast

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Re: how to determine %return on investments without including contributions
« Reply #12 on: April 24, 2018, 03:02:21 PM »
Am I correct in thinking that most people don't take into account the contributions they make during the year when they report their %returns (ie, most people just calculate % return based on beginning and ending value of their investment portfolio without separating out contributions)?
I guess nobody does that because it will give absurd numbers. I think many people simply do not calculate returns, or only with broker or third party software that displays the info by default. I use the XIRR method, using the day each contribution entered its investment account.

I am a little confused about the point of time weighted returns. Doesn't that simply give the rate of return of the underlying fund or asset allocation? Why is that useful? Wouldn't the money weighted return, a.k.a. the investor return, be more relevant?

Interest Compound

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Re: how to determine %return on investments without including contributions
« Reply #13 on: April 24, 2018, 04:49:00 PM »
Am I correct in thinking that most people don't take into account the contributions they make during the year when they report their %returns (ie, most people just calculate % return based on beginning and ending value of their investment portfolio without separating out contributions)?
I guess nobody does that because it will give absurd numbers. I think many people simply do not calculate returns, or only with broker or third party software that displays the info by default. I use the XIRR method, using the day each contribution entered its investment account.

I am a little confused about the point of time weighted returns. Doesn't that simply give the rate of return of the underlying fund or asset allocation? Why is that useful? Wouldn't the money weighted return, a.k.a. the investor return, be more relevant?

I'd only find the Time-Weighted return useful when trying to calculate my return across a variety of securities, in many different accounts. I personally don't find value in calculating returns, so I never do it :)

hadabeardonce

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Re: how to determine %return on investments without including contributions
« Reply #14 on: April 25, 2018, 10:34:27 AM »
You might find Calculating personal returns - Bogleheads interesting.
I didn't know that I had been looking for that spreadsheet all my life. Thank you.

dbm

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Re: how to determine %return on investments without including contributions
« Reply #15 on: April 25, 2018, 07:43:51 PM »
Am I correct in thinking that most people don't take into account the contributions they make during the year when they report their %returns (ie, most people just calculate % return based on beginning and ending value of their investment portfolio without separating out contributions)?
I guess nobody does that because it will give absurd numbers. I think many people simply do not calculate returns, or only with broker or third party software that displays the info by default. I use the XIRR method, using the day each contribution entered its investment account.

I am a little confused about the point of time weighted returns. Doesn't that simply give the rate of return of the underlying fund or asset allocation? Why is that useful? Wouldn't the money weighted return, a.k.a. the investor return, be more relevant?

TWRR assesses the return on your portfolio based on the value each day, so many people view this as a more correct way to calculate performance, as it calculates each day's return based on the actual balance each day.  It deals very well with flows in and out of the portfolio.  If we have a portfolio worth $100k at the beginning of the year, and you deposit $250k on the third last day of the year, TWRR calculates 362 days worth of performance based on the $100K, and three days including the $250K.  If you calculate performance using other methods, you can get wildly different answers.  Same if you made deposit early in the year.  On the other hand if you have a portfolio worth $1M and deposit $3k a month, most methods will produce similar rates of return.

For me, it's more about what the dollars I earned from the portfolio, but I like to check how I am tracking against composite indices, as well as giving me an excuse to muck around with spreadsheets!

Cheers!

Radagast

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Re: how to determine %return on investments without including contributions
« Reply #16 on: April 25, 2018, 08:59:55 PM »
Am I correct in thinking that most people don't take into account the contributions they make during the year when they report their %returns (ie, most people just calculate % return based on beginning and ending value of their investment portfolio without separating out contributions)?
I guess nobody does that because it will give absurd numbers. I think many people simply do not calculate returns, or only with broker or third party software that displays the info by default. I use the XIRR method, using the day each contribution entered its investment account.

I am a little confused about the point of time weighted returns. Doesn't that simply give the rate of return of the underlying fund or asset allocation? Why is that useful? Wouldn't the money weighted return, a.k.a. the investor return, be more relevant?

TWRR assesses the return on your portfolio based on the value each day, so many people view this as a more correct way to calculate performance, as it calculates each day's return based on the actual balance each day.  It deals very well with flows in and out of the portfolio.  If we have a portfolio worth $100k at the beginning of the year, and you deposit $250k on the third last day of the year, TWRR calculates 362 days worth of performance based on the $100K, and three days including the $250K.  If you calculate performance using other methods, you can get wildly different answers.  Same if you made deposit early in the year.  On the other hand if you have a portfolio worth $1M and deposit $3k a month, most methods will produce similar rates of return.

For me, it's more about what the dollars I earned from the portfolio, but I like to check how I am tracking against composite indices, as well as giving me an excuse to muck around with spreadsheets!

Cheers!
Portfolio Visualizer now gives both time and money weighted returns on regular monthly investments, or CAGR on single lump sums. I backtest VTSAX from the first month it existed. For a single lump sum it says "CAGR 6.84%." For a periodic investment every month it says "TWRR 6.84%." OK, so VTSAX earned 6.84% over that period and I would have too if I had invested all my money in a single lump. I guess I don't understand why that is more useful than what my invested money actually did based on the actual times it was invested.

Here is an example. If you invested $1,000 every month into Vanguard Extended Duration Treasury Bond Fund EDV from January 2009 through December 2013, TWRR shows a negative number, while MWRR shows a positive number. Completely opposite results for the exact same series of investments. Time weighted is wrong, and money weighted is right, because the investor ended with more money than was invested. So it seems like time weighted is separated from reality and therefore pointless. Or am I missing something? I am not an accountant or anything close, and only became aware of TWRR existence in the last month. If I am not missing something, this might be my investing pet peeve, because pretty much everyone seems to think as if they get the return of a lump sum, when actually the get the return of an ongoing series of contributions and withdrawals.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2009&firstMonth=1&endYear=2013&lastMonth=12&endDate=04%2F25%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=5&showYield=false&reinvestDividends=true&symbol1=EDV&allocation1_1=100

dbm

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Re: how to determine %return on investments without including contributions
« Reply #17 on: April 26, 2018, 06:47:46 AM »

Portfolio Visualizer now gives both time and money weighted returns on regular monthly investments, or CAGR on single lump sums. I backtest VTSAX from the first month it existed. For a single lump sum it says "CAGR 6.84%." For a periodic investment every month it says "TWRR 6.84%." OK, so VTSAX earned 6.84% over that period and I would have too if I had invested all my money in a single lump. I guess I don't understand why that is more useful than what my invested money actually did based on the actual times it was invested.

Here is an example. If you invested $1,000 every month into Vanguard Extended Duration Treasury Bond Fund EDV from January 2009 through December 2013, TWRR shows a negative number, while MWRR shows a positive number. Completely opposite results for the exact same series of investments. Time weighted is wrong, and money weighted is right, because the investor ended with more money than was invested. So it seems like time weighted is separated from reality and therefore pointless. Or am I missing something? I am not an accountant or anything close, and only became aware of TWRR existence in the last month. If I am not missing something, this might be my investing pet peeve, because pretty much everyone seems to think as if they get the return of a lump sum, when actually the get the return of an ongoing series of contributions and withdrawals.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2009&firstMonth=1&endYear=2013&lastMonth=12&endDate=04%2F25%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=5&showYield=false&reinvestDividends=true&symbol1=EDV&allocation1_1=100

I just got home from the pub, and pulled the historic data from the alphavantage api for EDV and plugged the data into my TWRR spreadsheet and it calculated the value fairly closely, most likely explained by what price choosing to buy at (I used average of OHLC) the first trading day of each month, treatment of income, etc, I received an annualised return of 1.93%.

So without seeing how they calculated their numbers, I can't comment, but you are right, the total return is greater than zero.

HAPPYINAZ

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Re: how to determine %return on investments without including contributions
« Reply #18 on: April 26, 2018, 01:31:58 PM »
You might find Calculating personal returns - Bogleheads interesting.

Thanks!  very useful spreadsheet!