I agree that when calculating IRR, all complete dividend and transactions with all commissions and brokerage fees must be included. However, I think what is missing is the accounting for idle cash as one is looking at a portfolio return rather than a return from stock purchased.
The more accurate approach maybe to have a portfolio (comprising of both stocks and shares and standby cash) set aside and to track additions and withdrawals to that portfolio.
I will use my SRS Account as an example as I have full records to do the analysis. I started my investment journey on 31 Oct 04 with $10,812 in cash carried over from my SRS contribution of the previous year. I subsequently contributed additional funds into my SRS Account on the following dates:
Dates Contribution
31-Oct-04 (Start) $10,812
13-Nov-04 $14,025
31-May-05 $12,750
10-Mar-06 $11,475
17-Jan-07 $11,475
11-Jan-08 $11,475
25-May-09 $11,475
22-Jan-10 $11,475
19-Jan-11 $11,475
18-Apr-11 $1,275
11-May-12 $12,750
My SRS account has grown over the years:
Dates SRS Account STI
(incl Div) (excl Div)
31-Dec-04 $24,377 2066.14
31-Dec-05 $41,469 2347.34
31-Dec-06 $70,089 2985.83
31-Dec-07 $94,935 3482.30
31-Dec-08 $63,476 1761.56
31-Dec-09 $131,256 2897.62
31-Dec-10 $177,368 3190.04
31-Dec-11 $162,758 2646.35
31-May-12 $200,999 2772.54
The first advantage of this approach is that the growth of my SRS account can be compared against the growth of the overall Singapore Stock Market as measured by the Straits Times Index (STI) as given in the table above.
Taking into account my yearly contributions, I have worked out the Internal Rate of Return (IRR) of my SRS account and benchmarked it against the STI for comparison. Do note that the comparison IS biased in favor of my SRS account as it includes dividends whereas the STI does not.
Period of IRR SRS Account STI
(incl Div) (excl Div)
IRR from 31 Oct 04 to 31 Dec 04 -12% 29%
IRR 2005 14% 14%
IRR 2006 34% 27%
IRR 2007 17% 17%
IRR 2008 -40% -49%
IRR 2009 81% 64%
IRR 2010 24% 10%
IRR 2011 -14% -17%
IRR from 31 Dec 11 to 31 May 12 41% 12%
IRR from 31 Oct 04 to 31 Dec 12 9% 4%
IRR from 31 Oct 04 to 31 May 12 11% 5%
IRR from 31 Dec 06 to 31 Dec 12 6% -2%
IRR from 31 Dec 06 to 31 May 12 9% -1%
With an out-performance of about 6% per year my SRS should be outperforming the STI as the latter’s current dividend yield is about 2.92%.
The second advantage of this approach is that I can track my out-performance over time to gauge if I am improving or if I should just give up and go with the traditional passive ETF investment model. From the data, it appears that all of my out-performance occurred only from 2006 onwards (out-performance of 10% per year) so I think I am getting the hang of journeying on this road less traveled.
Finally to answer the topic of this thread, I believe that for me an overall absolute realistic return on value investing is of the order of 9 - 11% with a bias towards the upper end. The best case scenario based of the data I have presented above comprises (hopefully) of an STI growth of 5% per year and a portfolio out-performance (over and above the inclusion of dividends) of 10% per year.
BTW, two minor conceptual errors to correct on postings on MusicWhiz’s performance. STI 5-year return (excluding dividends though) should be based on
31 Dec 2006 – 2985.83 to 31 Dec 2011 - 2,646.35
rather than
1 Jan 2007 - 2,918.63 to 31 Dec 2011 - 2,646.35
and reinvested dividends only affect the invested amount and the final size of his investment portfolio and not his overall CAGR performance.
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