Performance in 2012

[cif5000]

Many years ago, I started using XIRR to calculate my returns to find out if I can consistently beat the market. It is useful to see if one can out-bet the index. Out-bet because XIRR counts only when money is placed on the table.

After I got my answer, I don't think it is of that much importance anymore to tabulate it annually although I still do it for the fun and continuation.

Now that I am doing investing on a regular basis, I think the most important measure of performance is the absolute return in $$$ and not in %. NAV method can be useful.

I will rather have $300,000 in absolute return than 30% XIRR on $100,000 average capital. Likewise, I hope I can be profitable every year regardless of the index performance.

[KopiKat]

I will rather have $300,000 in absolute return than 30% XIRR on $100,000 average capital. Likewise, I hope I can be profitable every year regardless of the index performance.

That'd be closer to 300% XIRR? You probably meant $30,000? Or $1Mil avg capital?
If so, I know what you must be trying to say and that's why I'm sticking to my own method of computing my performance which relates closer to my changes in Net Worth...

[corydorus]

Many years ago, I started using XIRR to calculate my returns to find out if I can consistently beat the market. It is useful to see if one can out-bet the index. Out-bet because XIRR counts only when money is placed on the table.

After I got my answer, I don't think it is of that much importance anymore to tabulate it annually although I still do it for the fun and continuation.

Now that I am doing investing on a regular basis, I think the most important measure of performance is the absolute return in $$$ and not in %. NAV method can be useful.

I will rather have $300,000 in absolute return than 30% XIRR on $100,000 average capital. Likewise, I hope I can be profitable every year regardless of the index performance.

Looks at it this way. 30% XIRR but only 100K absolute of a $M. This gives an indication you have under invest. And you can do more considering your return % capability.

If this do not works, you can leave the cash inside. As mentioned, XIRR is just a formula function to help automate your calculation. Entry and exit is up to you to decide.

NAV still can have the same problem if you classified a large portion of CASH as un-investible. Is this case you may have a larger % of NAV but a smaller cake.

[CityFarmer]

Many years ago, I started using XIRR to calculate my returns to find out if I can consistently beat the market. It is useful to see if one can out-bet the index. Out-bet because XIRR counts only when money is placed on the table.

After I got my answer, I don't think it is of that much importance anymore to tabulate it annually although I still do it for the fun and continuation.

Now that I am doing investing on a regular basis, I think the most important measure of performance is the absolute return in $$$ and not in %. NAV method can be useful.

I will rather have $300,000 in absolute return than 30% XIRR on $100,000 average capital. Likewise, I hope I can be profitable every year regardless of the index performance.

My experience is the absolute return is consistent with the XIRR % return.

Hmm... unless it is usage issue with XIRR.

NAV should have similar behavior...

[cif5000]

I will rather have $300,000 in absolute return than 30% XIRR on $100,000 average capital. Likewise, I hope I can be profitable every year regardless of the index performance.

That'd be closer to 300% XIRR? You probably meant $30,000? Or $1Mil avg capital?
If so, I know what you must be trying to say and that's why I'm sticking to my own method of computing my performance which relates closer to my changes in Net Worth...

I mean a 30% XIRR on $100k average capital gives only a $30k return. Compare that to a $300k return on whatever capital (e.g. $3m), I would rather be the latter. Sure, $300k on $3m gives only a 10% return but that's real $$$ that can be used.

As mentioned previously, the % is useful to gage if one is competent enough to pick stocks (as a serious hobby) and preferably use it to gage one over a period of time. After that, it is the $$$ that counts (as a livelihood).

[KopiKat]

From my limited experience in using XIRR, it does appear to me that the figure does get inflated on good years and is more negative on bad years.

In my case, I did a comparison by computing XIRR for the past 10 years which captures every transactions vs another that lumps all Buys as one transaction, all Sells as one and all Dividends as one.

I see an average 3% difference in my annual XIRR figures between the 2. But, for the XIRR of a longer period eg. 5-10 years, the 2 figures become more similar.

I think it's the annualising effect of XIRR. Even one year can be too short if we have numerous, large gains made in short periods. But over a longer period of 5-10 years, it becomes less significant.

I have not used NAV, but based on my understanding, it'd likely give a more accurate picture of the absolute gains/losses being made at any point in time.

PS. Here, I'm not confusing with the separate issue of unused cash and it's impact on performance.

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I mean a 30% XIRR on $100k average capital gives only a $30k return. Compare that to a $300k return on whatever capital (e.g. $3m), I would rather be the latter. Sure, $300k on $3m gives only a 10% return but that's real $$$ that can be used.

Haha.. who wouldn't...
But, I'll definitely lose sleep if my $$ is not working hard for me... so, the % return is still important to me...

[CityFarmer]

From my limited experience in using XIRR, it does appear to me that the figure does get inflated on good years and is more negative on bad years.

In my case, I did a comparison by computing XIRR for the past 10 years which captures every transactions vs another that lumps all Buys as one transaction, all Sells as one and all Dividends as one.

I see an average 3% difference in my annual XIRR figures between the 2. But, for the XIRR of a longer period eg. 5-10 years, the 2 figures become more similar.

I think it's the annualising effect of XIRR. Even one year can be too short if we have numerous, large gains made in short periods. But over a longer period of 5-10 years, it becomes less significant.

I have not used NAV, but based on my understanding, it'd likely give a more accurate picture of the absolute gains/losses being made at any point in time.

PS. Here, I'm not confusing with the separate issue of unused cash and it's impact on performance.

I agree NAV will give absolute return at any point in time, but the return at the end of each year should be very close if not same. If needed, a little trick on XIRR will able to give absolute return at any point in time too.

(Added) : I did a similar exercise, to lump all sale, dividend and buy as separate 3 transactions, the XIRR return is similar as "normal" XIRR return.