Investment Performance Report

I've often been baffled by the results of the "Performance by
Investment Account" report and have found the method used to provide
the "% Rate of Return". I had thought that this was an IRR which is
a complicated method that basically calculates the returns of every
transaction. For example, with IRR if you are making regular
contributions to a fund, the IRR return takes into account the timing
of each contribution.

However, I've discovered that Money's "% Rate of Return" in these
reports is in fact not an IRR but a simple calculation based on the
dollar value of return divided by the beginning value plus all net
deposits.

In detail, if you run a Performance by Investment Account report and
set the dates for "current year" to get a YTD return, the following
are displayed:

Investment
Value on 12/31/2006
Buys
Sells
Income
Value on (current date)
Cost Basis
Realized Gain/Loss
Net Purchases
Return for Period
% Rate of Return
Annual % Return

The Return for Period is a dollar value calculated as follows:

Value on (current date) - Value on 12/31/2006 - (buys - sells) +
Income

It takes your present value subtracts the beginning value to get the
simple increase or decrease in value. Then from that result subtract
the net purchases and add in any income. It may not be obvious why to
add income since it is already included in the current value if you
reinvest dividends and cap gains in a fund (the difference between the
current value and original value includes the income...so why add it
again?). The reason it is readded is that the net buys also include
the income and it was subtracted in the calculation.

So how is the "% Rate of Return" calculated? A simple calculation
would be to divide the return for the period by the beginning value,
but that is not what Money does. It divides the Return for Period by
the sum of the orginal value plus the Buys:

% Rate of Return = Return for Period / (Value on 12/31/2006 + Buys)

This seems to me to be an odd way to calculate the return. If you
have a high amount of net buys compared to the value at the beginning
of the year, it will skew the return down. For example, let's say
that I start the year with $100 in an S&P500 fund, I buy another $50
in the fund during the year and today have $160 in the fund.

The return for the period is $10 because you started with $100, added
$50 and ended up with $160. A simple approach would be to say that
you made a 10% return for the period because you made $10 on your
original $100. Money takes the most conservative approach and says
that you made $10 on an initial $150 investment or $10/$150 = 6.67%.
Neither of these approaches takes into account the timing of the net
buys. If I added the additional $50 on Jan 1, you would agree that
the real return was closer to 6.67% since I had the $150 invested all
year. If I added the extra $50 yesterday, the real return should be
almost exactly 10%.

Another way to look at is if I started with $100 and had $110 today
with no buys during the year, Money would correctly say that my return
was $10/$100 = 10%. If tomorrow I add $50 to the account and run the
report again tomorrow it will now say my return is $10/$150 = 6.67%.
My return for the year just went down significantly.

This shows the problem with not using an IRR to account for the timing
of the transactions. I've also confirmed that this is the behavior
in the Portfolio Manager.

Is there somewhere else in the program where IRR is actually used?

In microsoft.public.money, Jeff M wrote:

>I've often been baffled by the results of the "Performance by
>Investment Account" report and have found the method used to provide
>the "% Rate of Return". I had thought that this was an IRR which is
>a complicated method that basically calculates the returns of every
>transaction. For example, with IRR if you are making regular
>contributions to a fund, the IRR return takes into account the timing
>of each contribution.
>
>However, I've discovered that Money's "% Rate of Return" in these
>reports is in fact not an IRR but a simple calculation based on the
>dollar value of return divided by the beginning value plus all net
>deposits.

Good observations.

I find the Portfolio views to be more useful than that report. It
has various choices for showing performance. It can be grouped by
account or in other ways.

In the portfolio, %gain is "gain divided by cost basis" as a
percentage.

TR All Dates seems to be something like
((currentValue+amountReceived) / (amountSpent-amountReceived))-1 as
a percentage. So if you are where you started, it would read 0%.
If you lost all of your money, it would be -100%

Buy 100 xyz at $10, and sell 99 xyz at $10.11.

TR All will show 1%, and %gain will show 100%.

If you have no sales, these should come out the same, I think.

I would say that TR All can be useful, but as a metric, Annual
Return and the various TR over different periods (which use the IRR
calculations) seem more useful to me. I do not see a use for %gain.