What is a realistic return on value investing?

[smallcaps]

Hi all

Like to check with you if I am doing the XIRR function correctly. I do not have a separate bank account to track available cash for stock investments, and just want to use XIRR to compute the returns from my stock portfolio (no idle cash).

Start of year 1 (1/1/xx): -(market value of portfolio)
Date: -(purchases)
Date: + Div received
Date: + sales proceeds
End of year 1 (31/12/xx): +(market value of portfolio) or A
--> Compute CAGR for year 1 using XIRR

Start of year 2:-(market value of portfolio or A)
repeat the process
Eng of year2: +(market value of portfolio or B)
--> Compute CAGR for year 2 using XIRR

---> compute another overall CAGR for whole investment period of 2 years.

Is the above method acceptable for my purpose?

Thanks for your advice.

Not really, xirr used in this way is more like computing the efficiency of trades. It does not compute the actual return of a portfolio over a year. Meaning it would not be comparable to STI/funds if that is wat u want...

[jovialger]

Hi smallcaps

So I can't treat the XIRR as the performance of my stock portfolio in this way? I did not include idle cash in the computation, as "cash component" is a separate category of asset classes when I do up my annual networth statement, to compare against previous years.

XIRR for me, is just to look at the "returns" of the "stock investment" category. Overall networth includes all others like property, bonds, cash etc.

[smallcaps]

Hi smallcaps

So I can't treat the XIRR as the performance of my stock portfolio in this way? I did not include idle cash in the computation, as "cash component" is a separate category of asset classes when I do up my annual networth statement, to compare against previous years.

XIRR for me, is just to look at the "returns" of the "stock investment" category. Overall networth includes all others like property, bonds, cash etc.

I think it is not possible to isolate stock component this way without considering wea its capital came from/how the capital was used. Better to make an assumption about how much cash/capital is meant for stocks, so at least can make comparisons. Note that I'm not saying need actual cash withdrawals/injection but juz make some assumptions so as to make the return more comparable. For myself, the assumption was that cash level start at zero, purchase will deduct from cash level. If no cash, then it is an injection of capital. Sale will add to cash level. And cash is never withdrawn.

[corydorus]

XIRR is measure on efficiency of money you have invested not how much you have invested. A pretty good gauge on your capability in investment trades imo. Once you get the quality, we go for quantity.

[fat al]

The academic jargon for IRR or XIRR is "dollar-weighted return". It is commonly used for private equity, corporate investment evaluation. For capital market fund managers, the usual industry performance measurement method is "time-weighted return". The difference can be illustrated by the following examples:

Beginning of year investment value 100
At mid year additional injection of 20
End of year investment value 140
The IRR/XIRR is approx. 18.2%
Nominal accounting return = 140- 100 - 20 = 20

Adopting time-weighted return will yield different result depending on the mid year valuation of portfolio:

Scenario 1: If existing portfolio valuation was 90 when additional 20 is invested, the time weighted return will be
Return for 1H = 90/100-1 = -10%
Return for 2H = 140/(90+20) = 27%
Return for whole year = (1-10%)*(1+27%)-1 = 15%

Scenario 2: If existing portfolio valuation was 110 when additional 20 is invested, the time weighted return will be
Return for 1H = 110/100-1 = 10%
Return for 2H = 140/(110+20) = 8%
Return for whole year = (1+10%)*(1+8%)-1 = 18.5%

In theory, time weighted return requires daily computation and MTM if funds are moving in and out daily. For practical purposes at the expense of some accuracy, assumptions may be made that cashflows all occurs on a specific date like month-end so that computations is reduced to monthly basis.

It appears that:
- dollar-weighted (or IRR) will factor in market timing ability
- time-weighted will be more suitable to measure stock picking ability against benchmark over a longer term period.

Or as "smallcaps" succinctly puts it:

...xirr .... is more like computing the efficiency of trades. It does not compute the actual return of a portfolio over a year. Meaning it would not be comparable to STI/funds if that is wat u want...

My guess is that the way to measure returns will depend on how one wants to operate and benchmark.

[smallcaps]

XIRR is measure on efficiency of money you have invested not how much you have invested. A pretty good gauge on your capability in investment trades imo. Once you get the quality, we go for quantity.

Yes, it might actually be beneficial to compare transactional XIRR and portfolio XIRR (with idling cash) and try to find out why (if) the portfolio XIRR is lower. For my case, it would probably be due to inability to find suitable stocks to invest in, after a significant divestment. Basically, it would be comparing individual stock selection versus one's own overall stock investment strategy over the long term.

[CityFarmer]

There are two major ways to calculate return in this thread, one is NAV and another is XIRR. I am yet to find out the different between the two method on similar set of data, but I do believe the different is not significant.

As fat al has highlighted, NAV (time weighted return) requires daily computation, while XIRR needs only the cash flow transaction records. As a nonprofessional, XIRR seems an easy yet reliable proxy to get the result for our purpose

In this thread, Mr. d.o.g has given advice on the computation of NAV. For those interested, you may want to do a search in this thread.

[Ferns]

Hi, I'm just wondering how to use IRR if I'm buying units of the STI ETF every month.

If I key in
12 Jan 2014 (300)
12 Feb 2014 (300)
12 Mar 2014 (300)
and so on
12 Dec 2014 (300)
and
12 Jan 2015 4000 (assuming I cash out and receive this amount)

Would this work with IRR? From what I have read on the thread is that we need to include the amount injected, but this is somewhat a savings plan, there is no original amount injected so to speak and $300 is injected every month to do a DCA. Would this be the correct way to record it? Or should I include another entry that says I injected $3600 at the start of the year, since that would be the amount I'll be investing throughout the year.

[piggo]

Think u should be considering XIRR as a factor in the date that you "inject" into the savings plan.... that's a more accurate measure since you're not really injecting $3600 at the start, but it's spread throughout the year.

So assuming that you cash out $4000 in 12/1/2015 your XIRR should be 20% as opposed to IRR of 2% because your dollars after Jan 2014 did not earn u as much as the dollars put in dec 2013

[corydorus]

Monthly $300 is your injected amount. Plug into excel as below transactions.

12-Jan-14 ($300.00)
12-Feb-14 ($300.00)
12-Mar-14 ($300.00)
12-Apr-14 ($300.00)
12-May-14 ($300.00)
12-Jun-14 ($300.00)
12-Jul-14 ($300.00)
12-Aug-14 ($300.00)
12-Sep-14 ($300.00)
12-Oct-14 ($300.00)
12-Nov-14 ($300.00)
12-Dec-14 ($300.00)
12-Jan-15 $4,000.00

Your XIRR will be 21.0%