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Posted by Igor Chudov on May 19, 2009, 7:03 pm
I may have asked this question some years earlier, but I hope that
perhaps something has changed and I can find an answer to my
question.
My question is that I have two Ameritrade accounts, regular and IRA,
into which I made additions from time to time, never on a regular
schedule. Besides that, I made various trades at various times, as
well, received dividends and whatnot.
What I would like to know is a fair calculation of my rate of return
on this account, year by year, properly taking into account things
such as added money etc.
Is there some software that would do it?
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Posted by Tad Borek on May 19, 2009, 8:17 pm
Igor Chudov wrote:
> Is there some software that would do it?
Excel's XIRR() function will. You only need to trap deposits and
withdrawals from the account, as well as the final value, if you want
IRR on an account level. The dividends and interest are happening
internally and contribute to the end value and IRR.
If you want IRR for specific investments you'll need to track
purchase/sale dates, dividends paid, and current values. But it's a lot
easier to research the historical performance of the given security instead.
-Tad
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Posted by Igor Chudov on May 22, 2009, 11:57 am
> Igor Chudov wrote:
>> Is there some software that would do it?
>
>
> Excel's XIRR() function will. You only need to trap deposits and
> withdrawals from the account, as well as the final value, if you want
> IRR on an account level. The dividends and interest are happening
> internally and contribute to the end value and IRR.
>
> If you want IRR for specific investments you'll need to track
> purchase/sale dates, dividends paid, and current values. But it's a lot
> easier to research the historical performance of the given security instead.
Tad, thanks a lot. Google Spreadsheets has two useful things: the XIRR
function that you recommend, and GoogleFinance function that lets you
access current and historical stock prices (and a lot more!).
I set up a spreadsheet, to count cash value only, as follows: On the
left column there is a transaction date. On the right column there are
cash flows; such that the starting amount is negative, all cash
additions are negative, all disbursements are positive, and the final
yesterday portfolio value is positive.
I started in May 2003, as, sadly, Ameritrade statements are not
accessible beyond 6 years.
I fed this data into XIRR function and got a total XIRR return from
May 2003 until yesterday to be 4.5% per annum.
For the same period, thanks to GoogleFinance function, the return of
S&P 500 index, WITHOUT dividends, was -0.59% per annum. I do not know
how to do a S&P total return (with dividends) in GoogleFinance. But
the data for 2003-2009 suggests 1.75% average yield for the period.
This makes S&P total return to be approximately 1.16% for the period.
Note that this fully ignores tax effects, as I did not pay taxes from
my brokerage account. Going into tax effect would be very painful, but
my first guess based on some money losing trades is that I did not pay
a lot of capital gains taxes because I sold a couple of losers and did
not sell a lot of winners. I did not get that much in the way of
dividends. This is very unscientific, of course, but my hunch is that
taxes did not amount to much.
All trading commissions are fully included in the calculation, since I
went by account balance.
The good news is that my account, if I believe my own math,
outperformed S&P. S&P index changed from 963 in May 2003 to 888 in May
2009, by 3.36%.
The bad news is that this outperformance amounted to not a lot of
money, in terms of my monthly income, and took an inordinate amount of
personal time and work (inordinate to my standards). I would be
much richer, for the period, if I put all my trading money into
spiders and spent tha time programming computers for profit. I also
spent big money on finance related books, which again is not counted
above.
The results are very revealing and very sobering.
I did the same for my Ameritrade IRA, which, fortunately, is insulated
from tax effects. There, for the same period, the rate of return was
6.40%, which outperformed S&P by 5.2%. It sounds like an impressive
number, but amounted only to a very small sum, because that IRA has
not much money.
I think that I enjoy investing activity, thinking about this stuff
etc, but there are other things that I enjoy not less. A lot of food
for thought.
Thanks for recommending the spreadsheet approach Tad.
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Posted by Tad Borek on May 22, 2009, 1:38 pm
Igor Chudov wrote:
> Thanks for recommending the spreadsheet approach Tad.
[I hope the moderators tolerate this thread, to me nothing is more
fundamental to an individual investor than figuring out how they're
actually doing with their investment choices!]
Glad that was helpful...in case you're interested in the 2.0 approach,
here are some more ideas. There are a weaknesses in the IRR comparison
you did, in addition to the ones you mentioned (taxes, dividends). The
first may have an easy solution, the second is a lot more difficult.
If you had no deposits and withdrawals since your starting date,
comparing your IRR to that of a benchmark index over the same period
gives a meaningful result, and estimating the effects of dividends for
the index isn't hard to do. But that's an unusual case, and IRR blows up
when you factor in timing of your deposits/wdls. As an extreme, imagine
the scenario was:
Deposited $1,000 March 3 2000, bought three stocks; this is "day 1" for
the S&P500 benchmark
Deposited $100,000 March 3 2009, bought a stock index fund
Calculated returns May 2009
Obviously a market-beating IRR doesn't tell you much, because the timing
and amounts of your investments would produce a much higher IRR for your
portfolio than the index over that period (the start date was near the
peak of the 2000 stock market bubble, but little was invested; the
second date had a rapid ~40% runup right after it, with a lot of money
going along for the ride). This is an extreme but at some level the
issue crops up with any deposits/wdls.
How to address this? It isn't easy because a price index doesn't show
the effect of dividends. One method might be to download data for one of
the total return indices (e.g. the Russell 3000 series with all
dividends reinvested) and turn each deposit or withdrawal into a
purchase or sale of an "index unit" based on the price of the R3K-w/divs
that day. Instead of using IRR, tally up your index units at the end,
compare their value to what you ended up with. That will at least solve
the timing aspect of the comparison. I've started this basic thing in an
MS Access app but never got it quite there.
The second issue is risk-adjusting that IRR, which is a pretty
open-ended thing. I think most people are good with "did I beat the
market?" as a starting point. But if you owned 50% bonds, comparing to
the S&P 500 isn't a fair comparison. This obviously can get a lot more
complicated if you try to factor in that aspect because you might need
to know your asset allocations throughout to do a fair comparison.
-Tad
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Posted by Igor Chudov on May 22, 2009, 3:02 pm
> Igor Chudov wrote:
>> Thanks for recommending the spreadsheet approach Tad.
>
> [I hope the moderators tolerate this thread, to me nothing is more
> fundamental to an individual investor than figuring out how they're
> actually doing with their investment choices!]
I am sure that the brokerage industry would hate what I would like to
see proposed, which is to require them to calculate and compare
investors' results with several benchmarks.
> Glad that was helpful...in case you're interested in the 2.0 approach,
> here are some more ideas. There are a weaknesses in the IRR comparison
> you did, in addition to the ones you mentioned (taxes, dividends). The
> first may have an easy solution, the second is a lot more difficult.
.... snipped good points ...
This depends on how IRR is calculated, which is not something that I
know. I would imagine that a "value weighted IRR" would be indeed more
useful, as it would compare apples to apples.
> How to address this? It isn't easy because a price index doesn't show
> the effect of dividends.
I did try, with some approximations, to take dividends into account
when comparing with SPY.
> One method might be to download data for one of
> the total return indices (e.g. the Russell 3000 series with all
> dividends reinvested) and turn each deposit or withdrawal into a
> purchase or sale of an "index unit" based on the price of the R3K-w/divs
> that day. Instead of using IRR, tally up your index units at the end,
> compare their value to what you ended up with. That will at least solve
> the timing aspect of the comparison. I've started this basic thing in an
> MS Access app but never got it quite there.
That should work very well and is a good idea.
> The second issue is risk-adjusting that IRR, which is a pretty
> open-ended thing. I think most people are good with "did I beat the
> market?" as a starting point. But if you owned 50% bonds, comparing to
> the S&P 500 isn't a fair comparison. This obviously can get a lot more
> complicated if you try to factor in that aspect because you might need
> to know your asset allocations throughout to do a fair comparison.
That brokerage account, was 100% stocks only at the time. My approach
was to keep my stock trading at Ameritrade, bonds and money market at
Vanguard, euros at a bank etc. However, in the future, due to rise in
various asset allocation ETFs, I will use Ameritrade more for
non-stock investments. It will, without a doubt, make it more
complicated to compare returns, but it will make other things easier
such as changing asset allocation.
Another aspect of risk, besides allocation to asset classes, was
diversification. In this respect, my own investments were very poorly
diversified in some sense, but some investees themselves were rather
well diversified.
I am sorry for sounding gloomy in the previous post. The return on
time invested was not much. However,
1) I am much more optimistic regarding future returns in general,
compared to our past ten years results, given much more investor
friendly price levels. Our family still has 100% of our retirement
money in stocks, after a big but poorly timed move from money markets
in November.
2) Since I have a more assets than I had 6 years ago, producing a
similar outperformance for the next 6 years will yield a much better
return on time invested. I did not realize it when I made my previous
post. Of course, this outperformance is very far from assured.
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