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Hi,
Suppose you are investing several times into a single stock, mutual
fund, etc. What is the proper way of calculating the interest rate?
How would one annualize it? What is the name for this calculation?
For example, at the beginning of the year, a stock is $100 and at the
end it's $110. The stock has gone up 10%. However, suppose you bought
a share of it at the $100 and then, in the middle of the year, another
share at $150. So, you invested $250, though in the end, you only have
$220. Obviously, the interest rate that you see, when you are making
regular investments, is different from the reported interest rate.
One possible solution is to simply consider the final value as
compared to the amount of money invested. Continuing the example
above, this would give a rate of $220 / $250 - 1 = -12%. Is this the
right calculation? The reason I am unsure is that this return is not
annualized since the second investment is made mid-year. How would I
annualize the calculation?
Thanks.
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j...@y...com wrote:
> Hi,
>
> Suppose you are investing several times into a single stock, mutual
> fund, etc. What is the proper way of calculating the interest rate?
> How would one annualize it? What is the name for this calculation?
>
> For example, at the beginning of the year, a stock is $100 and at the
> end it's $110. The stock has gone up 10%. However, suppose you bought
> a share of it at the $100 and then, in the middle of the year, another
> share at $150. So, you invested $250, though in the end, you only have
> $220. Obviously, the interest rate that you see, when you are making
> regular investments, is different from the reported interest rate.
>
> One possible solution is to simply consider the final value as
> compared to the amount of money invested. Continuing the example
> above, this would give a rate of $220 / $250 - 1 = -12%. Is this the
> right calculation? The reason I am unsure is that this return is not
> annualized since the second investment is made mid-year. How would I
> annualize the calculation?
The back of the envelop way to do it in you example is to assume the
return is actually for 9 months, the average of the two periods. This is
an annualized -16% or so.
But at day's end, you are still down 12%.
Excel has IRR (internal rate of return) that allows for multiple inputs
and withdrawals.
Annualizing some data is meaningless. I buy a stock and sell it 3 days
later for a 3% return. Well, 1.03^122 (the number of 3 day periods in a
year) is 36.8, a 3580% annualized return! Exciting, but meaningless.
Joe
www.blog.joetaxpayer.com
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
On Sep 3, 5:19 pm, j...@y...com wrote:
> Hi,
>
> Suppose you are investing several times into a single stock, mutual
> fund, etc. What is the proper way of calculating the interest rate?
> How would one annualize it? What is the name for this calculation?
>
> For example, at the beginning of the year, a stock is $100 and at the
> end it's $110. The stock has gone up 10%. However, suppose you bought
> a share of it at the $100 and then, in the middle of the year, another
> share at $150. So, you invested $250, though in the end, you only have
> $220. Obviously, the interest rate that you see, when you are making
> regular investments, is different from the reported interest rate.
>
> One possible solution is to simply consider the final value as
> compared to the amount of money invested. Continuing the example
> above, this would give a rate of $220 / $250 - 1 = -12%. Is this the
> right calculation? The reason I am unsure is that this return is not
> annualized since the second investment is made mid-year. How would I
> annualize the calculation?
>
> Thanks.
There is more than one way to calculate it.
Here are several:
([starting value-.5*deposits]/[ending value+.5*desposits])-1
[Ending Value + all withdrawals]/[Starting Value + all deposits] - 1
S = Starting portfolio value.
E = Ending portfolio value
F = net cash Flow = deposits - withdrawals
F must include all money moving in or out of the portfolio.
G = Gain = E-S-F (Will be negative in the case of a loss.)
If you made all deposits or withdrawals at the end of the period, your
percentage gain or loss, also called Return On Investment (ROI), would
be G / S. If you made all deposits or withdrawals at the start of the
period ROI would be G / (S+F). If your deposits and/or withdrawals are
made evenly over the period, a reasonable approximation is
ROI = G / (S+(F/2)).
Modified-Dietz Method
r(T) = {MV(T)-MV(0)-sum[C(t)]}/{MV(0)+sum[w(t)*C(t)]}
r(T)... Modified Dietz Return
MV(T)... Ending market value
MV(0)... Beginning market value
C(t)... Net contribution occurring on day t
w(t)... weight of the net contribution on day t...
w(i) = {T - t} / T
T... Total number of days
t... day the net contribution occurs
The Modified Dietz method assumes that net contributions are invested
at the end of the respective day they occur.
XIRR in Excel will also work- this might need to be installed before
used.
**The above were pasted from the same question I posed to another
investing forum, the first one is the one I use**
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
j...@y...com wrote:
> Suppose you are investing several times into a single stock, mutual
> fund, etc. What is the proper way of calculating the interest rate?
> How would one annualize it? What is the name for this calculation?
A common one is IRR, internal rate of return. If you have Excel, check
out the XIRR function, which deals with investments made at irregular
time intervals - the help file describes how to use it.
-Tad
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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