Why would ROI change if I sell a money market fund?

Don Awalt

I track my investments through the Investment tab/Portfolio tab report. Looking at the "ROI (%)" calculation, I manually entered the "Sold" of a money market mutual fund (eventually using that cash to "BoughtX" another new mutual fund), and it put the money into the associated cash account, so far so good. Yet, I noticed the ROI (%) calculation dropped for that fund and for the overall portfolio after this transaction! 

If I understand what it means by ROI, that would be (Current Value of Investment - Cost of Investment) / Cost of Investment.

None of these values have changed for my portfolio, unless it does not count the money in a cash account. But if that was the case, subtracting the liquidation amount from both Current Value of Investment and Cost of Investment would be a larger percentage, not smaller. It looks to me like it counts cash accounts in the Current Value of Investment but not in the Cost of Investment?

Why would what be?

And then when I entered the "BoughtX" money so the cash is out of the Cash Account and into another mutual fund, the ROI (%) did not change. This seems to indicate the issue is not money sitting in a cash account.

Does this look correct or is this a bug in ROI calculation? I never heard of ROI going down when money market shares are liquidated. Thanks.

Jim_Harman

Others have investigated this more thoroughly, but it appears that the ROI (%) is being computed incorrectly.

Based on the Glossary in the Help, it is supposed to be Return / Amount Invested, where
Return = ending market value + cash taken out - Amount Invested
Amount Invested = starting market value + cash in

The analysis period is from the date set in Options > Portfolio preferences to the As of date.

It appears that Quicken is not including the cash taken out in the calculation.

Update: The results are inconsistent. I added the Amount Invested and Return columns to the portfolio view and now the ROI (%) calculation looks correct. Perhaps the Return value is not being computed correctly unless it is displayed.

I would be interested to know if adding the Return column to your view affects what is displayed for ROI (%).

Don Awalt

@Jim_Harman interesting...another possible issue with this, I am playing with the Analysis period setting you mentioned above - if I set it to Jan 1 this year or prior, including the "earliest" setting, the ROI is identical. If I set it to anything in this calendar year, it varies based on the date I check. Not sure what that is doing at all, ROI should be changing for dates prior to Jan 1 this year...?

Jim_Harman

See my updated post above for further observations. 

Note that ROI is not annualized, it is the total percentage change. This makes it useful mostly for periods of less than one year.

If you want annualized performance measurements for periods of more than one year, the Average annual return (IRR) is a better measure.

Don Awalt

Thanks for the update @Jim_Harman. I added the Return and Amount Invested columns, and the ROI showing did not change. I did run some calculations, and by hand if I calculate Return/Amount Invested, it is 1.99% for my money market. But the ROI (%) column shows 1.03%. For the whole portfolio, manual calculation of Return/Amount Invested is 31.5%, but the ROI (%) column shows as 16.09%. Return calculations in Options is set to "Earliest possible date". So there must be more to it or a bug.

Don Awalt

Sorry @Jim_Harman an update on info - because my column widths were not sized wide enough, I realized the ROI (%) column I have been referring to is ROI (%) YTD. That's why it doesn't change prior too Jan 1 and varies by date during the year. So I guess I am back to the original question of why redeeming money market to cash causes a change in ROI (%) YTD.

Jim_Harman

It's weird. Something I did caused the ROI (%) numbers to start computing correctly for me when there are sales of securities. It might have been just customizing the view, because that generally forces it to recompute.

Don Awalt

It did change for me when I did the initial redemption, the problem is I don't think it should have.

Jim_Harman

Right. Purchases and sales in a money market fund should not affect the ROI.
EMV = ending market value
SMV = starting market value
P = Purchases
S = Sales

Assuming there are no dividends,

EMV = SMV + P - S                          [the share price is always $1.00 for a MMF]
Amt invested = SMV + P                   [by definition]
Return = EMV + S  - Amt invested    [by definition]
    = (SMV + P - S)  + S -  (SMV + P) 
    =  0

ROI = Return/Amt invested 
    = 0 / Amt invested
    = 0

Note that if there are reinvested dividends, the EMV will be higher and the ROI will be positive.

Don Awalt

I hope they will fix this, thanks @Jim_Harman

Jim_Harman

BTW there has been a lot of discusion here about the usefulness of "Amount Invested" because it does not increase with reinvested dividends or decrease with sales. It is definitely not the same as your cost basis.

I think it is useful mainly as as the "I" component of the ROI calculation.