Quicken Investment Performance Calculation Does Not Handle Withdrawals

Chuck Cobb

I'm having a problem with the Quicken For Windows Investment Performance Report.  It does not correctly handle withdrawals.  When some funds are withdrawn from an investment account, it shows that as a reduction in value and a reduction in the total return of the account and that is not correct.

Is there a solution to this problem?

q_lurker

I understand your thinking, but Quicken has it right.  You are suggesting if you started with $200, you withdrew $75 and your ending value was $125, then your value has dropped by $75 and there is a withdrawal of $75.  That sounds like double counting.  

That is not the way the math applies in the equation.  The Beginning and Ending balances are just like other transactions.  In my simple case above, there were $200 on the investment side and $200 on the return side ($75 withdrawal and $125 ending).  Those should net to a 0% return.    

Tom Young

The Performance Report is a mathematical construct.  It looks at the Account's opening balance, the Account's closing balance, cash inflows to the Account and cash outflows from the Account, as well as the dates attached to each of these elements.  Through a process if iteration it calculates an annual percentage rate.  The rate it presents is the one interest rate that, when applied to all of these elements and taking into account their dates, (a process called "discounting") brings the sum of the opening and closing balances and the cash flows to $0.

Taking cash out of an Account certainly is a reduction of that Account's value, there's no disputing that.  The timing of that removal does affect the calculated interest rate.

Simple examples: 

You deposit $100 into a savings account with a floating interest rate.  Exactly one year later you close the account and take out $110.  The math says the performance of that account is 10%.

You deposit $100 into a savings account with a floating interest rate, withdraw $30 the next day and at the end of the year you close the account, taking out $80.  Over the course of the year you put $110 into your pocket, same as the first example, but the calculated interest rate in this case, (I didn't do the math), is going to be much higher since, effectively, you really only had $70 invested for most of the year.

The figure presented by the Performance Report has been the subject of much discussion over the years and has been debated to death.  But I don't think anyone has ever come up with an example of where Quicken has made the calculation incorrectly.  It's fairly simple math (for a computer).

Jim_Harman

To explore this further, you can compare Quicken's calculation to Excel's XIRR function. I think you will see that they are the same.

GLKNY

Tom Young said:

The Performance Report is a mathematical construct.  It looks at the Account's opening balance, the Account's closing balance, cash inflows to the Account and cash outflows from the Account, as well as the dates attached to each of these elements.  Through a process if iteration it calculates an annual percentage rate.  The rate it presents is the one interest rate that, when applied to all of these elements and taking into account their dates, (a process called "discounting") brings the sum of the opening and closing balances and the cash flows to $0.

Taking cash out of an Account certainly is a reduction of that Account's value, there's no disputing that.  The timing of that removal does affect the calculated interest rate.

Simple examples: 

You deposit $100 into a savings account with a floating interest rate.  Exactly one year later you close the account and take out $110.  The math says the performance of that account is 10%.

You deposit $100 into a savings account with a floating interest rate, withdraw $30 the next day and at the end of the year you close the account, taking out $80.  Over the course of the year you put $110 into your pocket, same as the first example, but the calculated interest rate in this case, (I didn't do the math), is going to be much higher since, effectively, you really only had $70 invested for most of the year.

The figure presented by the Performance Report has been the subject of much discussion over the years and has been debated to death.  But I don't think anyone has ever come up with an example of where Quicken has made the calculation incorrectly.  It's fairly simple math (for a computer).

I understand what you are saying, and also sympathize with Chuck's thinking. Although I don't want to re-start a decade old discussion, but is this the way that brokerage houses calculate performance?  i.e. I would want to see the numbers for performance similarly match up with TD Ameritrade as they do with Quicken.

Tom Young

Tom Young said:

The Performance Report is a mathematical construct.  It looks at the Account's opening balance, the Account's closing balance, cash inflows to the Account and cash outflows from the Account, as well as the dates attached to each of these elements.  Through a process if iteration it calculates an annual percentage rate.  The rate it presents is the one interest rate that, when applied to all of these elements and taking into account their dates, (a process called "discounting") brings the sum of the opening and closing balances and the cash flows to $0.

Taking cash out of an Account certainly is a reduction of that Account's value, there's no disputing that.  The timing of that removal does affect the calculated interest rate.

Simple examples: 

You deposit $100 into a savings account with a floating interest rate.  Exactly one year later you close the account and take out $110.  The math says the performance of that account is 10%.

You deposit $100 into a savings account with a floating interest rate, withdraw $30 the next day and at the end of the year you close the account, taking out $80.  Over the course of the year you put $110 into your pocket, same as the first example, but the calculated interest rate in this case, (I didn't do the math), is going to be much higher since, effectively, you really only had $70 invested for most of the year.

The figure presented by the Performance Report has been the subject of much discussion over the years and has been debated to death.  But I don't think anyone has ever come up with an example of where Quicken has made the calculation incorrectly.  It's fairly simple math (for a computer).

If you look at all the "performance" metrics that are available to you in Portfolio View you can see that there's dozens of them and I'd guess that brokerage houses use many of them, plus many metrics that Quicken doesn't have.

The annual percentage rate (APR) is very widely used measure of performance and Quicken's calculation will match the brokerage house's calculations if they are using the same cash flows.  So, for example, you have a mutual fund where all distributions are reinvested and you don't buy or sell any shares of the fund for, say, the calendar year, Quicken's calculation and the fund manager's calculation will match.  But if you buy and sell during the year then it would be pure luck if Quicken's calculation matches the fund's; maybe you bought low and sold high, resulting in a better performance than the fund's, or visa versa.

Jim_Harman

Tom Young said:

The Performance Report is a mathematical construct.  It looks at the Account's opening balance, the Account's closing balance, cash inflows to the Account and cash outflows from the Account, as well as the dates attached to each of these elements.  Through a process if iteration it calculates an annual percentage rate.  The rate it presents is the one interest rate that, when applied to all of these elements and taking into account their dates, (a process called "discounting") brings the sum of the opening and closing balances and the cash flows to $0.

Taking cash out of an Account certainly is a reduction of that Account's value, there's no disputing that.  The timing of that removal does affect the calculated interest rate.

Simple examples: 

You deposit $100 into a savings account with a floating interest rate.  Exactly one year later you close the account and take out $110.  The math says the performance of that account is 10%.

You deposit $100 into a savings account with a floating interest rate, withdraw $30 the next day and at the end of the year you close the account, taking out $80.  Over the course of the year you put $110 into your pocket, same as the first example, but the calculated interest rate in this case, (I didn't do the math), is going to be much higher since, effectively, you really only had $70 invested for most of the year.

The figure presented by the Performance Report has been the subject of much discussion over the years and has been debated to death.  But I don't think anyone has ever come up with an example of where Quicken has made the calculation incorrectly.  It's fairly simple math (for a computer).

The numbers should match, but note the following:

The Investment Performance report should match what FIs report as "Total Return" or "Average Annual Return". It matches what Morningstar's Portfolio Manager calls your "personal return". 

Quicken uses its share prices as of the day before the first day of the period to compute the starting value. Make sure those are correct in the price history. Thus 1/1 to 12/31 covers the whole year. Make sure the date range for the FI's analysis matches Quicken's.  Also make sure the values of any transactions are correct.

See the discussions about mutual fund share class conversions for info about problems with these transactions.

Quicken calculates annualized returns. Be careful if the analysis period is less than one year or the holding period for a security is less than the analysis period. If you want to see a more reasonable YTD number, set the date range to Yearly and Current year, not YTD.

It's a different topic, but note that Quicken's "Growth of $10,000" chart is incorrect when the account has deposits and withdrawals. They have acknowledged this problem.