What is a realistic return on value investing?

I am looking to track my portfolio return. Looking at this thread, I was wondering if I invest 50K at the start of 2010 and subsequently add more after getting my income, bonus etc. At the end of 2012, I would have probably invested 100K. If I use XIRR to track the returns, would it be accurate? Should we be tracking the return only on the 50K initial amount instead of the subsequent amount been added?

correct me if I am wrong, to use XIRR in excel, the time the money is injected into the portfolio is not important, but the time the money is deployed to buy something is very important.

(29-06-2012, 09:38 AM)Some-one Wrote: I am looking to track my portfolio return. Looking at this thread, I was wondering if I invest 50K at the start of 2010 and subsequently add more after getting my income, bonus etc. At the end of 2012, I would have probably invested 100K. If I use XIRR to track the returns, would it be accurate? Should we be tracking the return only on the 50K initial amount instead of the subsequent amount been added?

i suggest you might solve your headache by trying out Microsoft Money. You can download it FOC. i don't know why it is discontinued by Microsoft. If you find it works wonderfully for you, then buy me a "coffee" by telling me you are happy using it. We are actually very lucky, it is a free software only after Microsoft decided to discontinue selling it. Sometimes one K is better than KK. MHO.

(29-06-2012, 09:26 AM)KopiKat Wrote:

(29-06-2012, 01:34 AM)smallcaps Wrote:

(29-06-2012, 12:32 AM)swakoo Wrote:

(28-06-2012, 11:51 PM)smallcaps Wrote: This is the correct XIRR:

-100 1/1/2001 inject 100 into portfolio (buy A)
-100 1/1/2002 inject 100 into portfolio (buy B)
-100 1/1/2003 inject 100 into portfolio (buy C)
400 1/1/2004 market value (A+C as B was sold)

XIRR = 15.09%

The cash flows are incomplete - sales proceed for B is missing.

Quote:And this is the wrong XIRR that we get by blindly considering all transactions:

-100 1/1/2001 buy A
-100 1/1/2002 buy B
200 1/1/2003 sell B (earn 100)
-200 1/1/2003 buy C
400 1/1/2004 market value (A+C)

XIRR = 31.46%

Cash flows are complete and this is a possible scenario. Perhaps, you've underestimated yourself and this high XIRR is actually correct.....

I think the correct XIRR should be close to 15% since 300 was the total capital and on average the capital was there for 2 years. Thus the annualized return should be around squareroot(400/300) which gives 15.5%

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Just refactored my XIRR calculations to consider only capital injected and final value and as expected the rate is reduced from 26 to 23.8% over the same 7+ years.

It looks like XIRR is more accurate if we can properly identify cash flows in/out of a portfolio (like MIL type portfolio). For your eg., if we were to put in all buy/sell transactions (like what I was planning to do for mine as I can't identify my real in/out flow of funds), we may happily get an XIRR that's a lot better than it should be. Like your example, the Sell B @ 200 (100 profit) is nett off against Buy C @ 200 (new fund 100 + Profit 100 fm B) and when XIRR calculates, it just dumbly see 400/200 and gives a much higher XIRR (although we know that it should be 400/300!

I think I'll just have to stick to my non-scientifc method for my own portfolio...

Actually it's possible to do it by making assumptions because I also only have the buy/sell/dividends records:

-----------------capital (in/out) cash (last two columns)
-100 1/1/2001 buy A -100 0
10 1/1/2002 A dividend 0 10
-100 1/1/2002 buy B -90 (10-100) 0
200 1/1/2003 sell B (earn 100) 0 200
-250 1/1/2003 buy C -50 (200-250) 0
400 1/1/2004 market value (A+C) 400 0

Then the more accurate XIRR can be computed based on the capital(in/out) column. But of course it does not capture any cash injection that was left idling... for my case, this was almost non-existent as I prefer to be fully invested at all times.

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(29-06-2012, 09:46 AM)freedom Wrote: correct me if I am wrong, to use XIRR in excel, the time the money is injected into the portfolio is not important, but the time the money is deployed to buy something is very important.

As far as I understand, time of injection of capital is the important one and not when the capital was used to buy a stock. Because injection of capital already means the money is deployed (whether its held in cash or used to buy stock)

The time in which the stock is bought matters if we are measuring that stock purchase alone (and not on a portfolio basis)

(29-06-2012, 09:26 AM)KopiKat Wrote: It looks like XIRR is more accurate if we can properly identify cash flows in/out of a portfolio (like MIL type portfolio).

GIGO lah

Quote:Like your example, the Sell B @ 200 (100 profit) is nett off against Buy C @ 200 (new fund 100 + Profit 100 fm B) and when XIRR calculates, it just dumbly see 400/200 and gives a much higher XIRR (although we know that it should be 400/300!

And 400/300 is wrong too. Don't have all the details but from what I see the 3 purchases totaling 300 were done at different times. XIRR takes care of this automatically IF all cash flows are correctly entered.

Quote:.....(like what I was planning to do for mine as I can't identify my real in/out flow of funds).....

For a highly sophisticated portfolio like yours with a zillion kung fu transactions, it is likely tedious to sort out properly all the cash flows. I think it may be more useful (and that is if you want to do this) to focus on parts of the portfolio than the whole of it. Eg. SPH, your favourite yield stock - identify proper cash flows and once set up, CAGR for SPH (for any period you want) automatically drops out every time you do a kung fu on it.

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(29-06-2012, 09:38 AM)Some-one Wrote: I am looking to track my portfolio return. Looking at this thread, I was wondering if I invest 50K at the start of 2010 and subsequently add more after getting my income, bonus etc. At the end of 2012, I would have probably invested 100K. If I use XIRR to track the returns, would it be accurate? Should we be tracking the return only on the 50K initial amount instead of the subsequent amount been added?

The injections which will be either fresh stock purchases or cash into bank account (earning interest) can be entered with the respective dates. And their annualized returns from that date onwards will be calculated automatically by the XIRR formula. This is if you want to know the overall CAGR of your whole portfolio.

If you wanted to track the CAGR of your 50K initial amount only, then you don't enter the new injections. Only the dividends from the 50K investment.

Bottom line, determine your objective first and then set up the XIRR cash flows accordingly.

(29-06-2012, 09:57 AM)smallcaps Wrote:

(29-06-2012, 09:46 AM)freedom Wrote: correct me if I am wrong, to use XIRR in excel, the time the money is injected into the portfolio is not important, but the time the money is deployed to buy something is very important.

As far as I understand, time of injection of capital is the important one and not when the capital was used to buy a stock. Because injection of capital already means the money is deployed (whether its held in cash or used to buy stock)

The time in which the stock is bought matters if we are measuring that stock purchase alone (and not on a portfolio basis)

if we are going to measure the portfolio like this, it means, we do not need to record any buy/sell/dividends transactions any more. the only things matter are: the time & money injected into the portfolio, the time & money taken out the portfolio and the initial and period end value of the portfolio.

am I right?

(29-06-2012, 10:19 AM)freedom Wrote:

(29-06-2012, 09:57 AM)smallcaps Wrote:

(29-06-2012, 09:46 AM)freedom Wrote: correct me if I am wrong, to use XIRR in excel, the time the money is injected into the portfolio is not important, but the time the money is deployed to buy something is very important.

As far as I understand, time of injection of capital is the important one and not when the capital was used to buy a stock. Because injection of capital already means the money is deployed (whether its held in cash or used to buy stock)

The time in which the stock is bought matters if we are measuring that stock purchase alone (and not on a portfolio basis)

if we are going to measure the portfolio like this, it means, we do not need to record any buy/sell/dividends transactions any more. the only things matter are: the time & money injected into the portfolio, the time & money taken out the portfolio and the initial and period end value of the portfolio.

am I right?

Yes, it sounds right to me and it should around the same rate as NAV method, I presume.

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(29-06-2012, 09:38 AM)Some-one Wrote: I am looking to track my portfolio return. Looking at this thread, I was wondering if I invest 50K at the start of 2010 and subsequently add more after getting my income, bonus etc. At the end of 2012, I would have probably invested 100K. If I use XIRR to track the returns, would it be accurate? Should we be tracking the return only on the 50K initial amount instead of the subsequent amount been added?

Yes, I think XIRR will be accurate as long as the subsequent capital injections are taken into account. Should not just rely on the 50k initial amount as it might distort the result by a lot, much like doing ROE computations without taking into account capital injections into the balance sheet

(29-06-2012, 09:57 AM)smallcaps Wrote: Actually it's possible to do it by making assumptions because I also only have the buy/sell/dividends records:

-----------------capital (in/out) cash (last two columns)
-100 1/1/2001 buy A -100 0
10 1/1/2002 A dividend 0 10
-100 1/1/2002 buy B -90 (10-100) 0
200 1/1/2003 sell B (earn 100) 0 200
-250 1/1/2003 buy C -50 (200-250) 0
400 1/1/2004 market value (A+C) 400 0

Then the more accurate XIRR can be computed based on the capital(in/out) column. But of course it does not capture any cash injection that was left idling... for my case, this was almost non-existent as I prefer to be fully invested at all times.

Thx! In my case, it's beginning to look like a lot of work as I have just too many transactions. Most likely, I'll do it on a subset of transactions, as suggested by 'swakoo'.

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(29-06-2012, 10:06 AM)swakoo Wrote: For a highly sophisticated portfolio like yours with a zillion kung fu transactions, it is likely tedious to sort out properly all the cash flows. I think it may be more useful (and that is if you want to do this) to focus on parts of the portfolio than the whole of it. Eg. SPH, your favourite yield stock - identify proper cash flows and once set up, CAGR for SPH (for any period you want) automatically drops out every time you do a kung fu on it.

Great idea! Will definitely try it out but most likely, I'll do it in the manner of my Case 1 approach (aka MIL approach). It's a lot cleaner and just need to put in Cash In/Out flows and Cash Balance + Mkt Value at end period. No need to put in the zillions of transactions (if it exists).

(29-06-2012, 10:26 AM)smallcaps Wrote:

(29-06-2012, 10:19 AM)freedom Wrote:

(29-06-2012, 09:57 AM)smallcaps Wrote:

(29-06-2012, 09:46 AM)freedom Wrote: correct me if I am wrong, to use XIRR in excel, the time the money is injected into the portfolio is not important, but the time the money is deployed to buy something is very important.

As far as I understand, time of injection of capital is the important one and not when the capital was used to buy a stock. Because injection of capital already means the money is deployed (whether its held in cash or used to buy stock)

The time in which the stock is bought matters if we are measuring that stock purchase alone (and not on a portfolio basis)

if we are going to measure the portfolio like this, it means, we do not need to record any buy/sell/dividends transactions any more. the only things matter are: the time & money injected into the portfolio, the time & money taken out the portfolio and the initial and period end value of the portfolio.

am I right?

Yes, it sounds right to me and it should around the same rate as NAV method, I presume.

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(29-06-2012, 09:38 AM)Some-one Wrote: I am looking to track my portfolio return. Looking at this thread, I was wondering if I invest 50K at the start of 2010 and subsequently add more after getting my income, bonus etc. At the end of 2012, I would have probably invested 100K. If I use XIRR to track the returns, would it be accurate? Should we be tracking the return only on the 50K initial amount instead of the subsequent amount been added?

Yes, I think XIRR will be accurate as long as the subsequent capital injections are taken into account. Should not just rely on the 50k initial amount as it might distort the result by a lot, much like doing ROE computations without taking into account capital injections into the balance sheet

Thanks for the answer. Is CAGR the same as XIRR? CAGR is defined as Compound Annual Growth Rate. To me, it sounds like it is talking about growth rate but I am interested to know my annualised return of my portfolio including growth and dividend.

The discontinued Microsoft Money can give you ten times or more all the things you want to know about your stocks portfolio. And it is free now. Not only this, you can track your assets and liabilities to the minute details. Ha! Ha!
All you have to do is just track your cash flow (input all transactions correctly) No GIGO then you will be laughing why so difficult in the first place. Ha! Ha!