Is "Growth of $10,000" graph being calculated correctly in Quicken Premier ?

halhollis

I have a concern regarding the calculation of the "Growth of $10,000" plot in the "Performance" tab of "Investments". In particular, my question is: how is this calculated when money is regularly transferred into the investment account (dollar cost averaging)?

According to what I've read elsewhere, calculating this correctly involves finding the return for the holding period that begins after the previous deposit was made and ends with the current deposit.

For example, stipulate that the value of the investment is $1,500 after the initial deposit. Let this be the starting point for calculating the growth of $10,000.

One month later, a deposit of $1,000 is made and the total value is then $2,650. To find the growth of $10,000, the holding period return (HPR) needs to be calculated which is

HPR_1 = ($2,650 - $1,000) / $1,500 - 1 = 10%

It follows (I think) that, after this month, the "Growth of $10,000" chart should give a value of

$10,000 * (1 + HPR_1) = $11,000

Quicken does in fact report this after the first deposit. Now, a month later, a deposit of $1,000 is made and the total value is then $3,782.50. The HPR for the second month is

HPR_2 = ($3,782.50 - $1,000) / $2,650 - 1= 5%

and (I think) the "Growth of $10,000" chart should give a value of

$10,000 * (1 + HPR_1) * (1 + HPR_2) = $11,550

Similarly for 3rd (4th, etc.) month's deposits. That is, after N deposits, the "Growth of $10,000" plot should give a value of

$10,000 * (1 + HPR_1) * (1 + HPR_2) * ... * (1 + HPR_N-1) * (1 + HPR_N)

However, the Quicken "Growth of $10,000" doesn't agree with this. Evidently, Quicken calculates this like so

$10,000 * (Value after N deposits - Cumulative Net Additions) / Initial Value

For example, Quicken would calculate the "Growth of $10,000" after two months as

$10,000 * ($3782.50 - $2,000) / $1,500 = $11,883.33

For verification, I've included a screenshot of the Quicken report showing that this is the case. I've also included a screenshot of the the account register.

This may not seem like much of a difference but throw in a month with a steep drop followed by a month with a recovery, and the departure from the HPR method becomes extreme. I've included a screenshot of a spreadsheet that compares the results of the HPR method to the method that I believe Quicken uses.

Jim_Harman

@halhollis,

I agree with you 100%.

Quicken made some improvements in the Growth of $10,000 calculation a few months ago but it still suffers from the problem you describe. I have been holding off on publicizing this in hopes that someone like you would notice it.

Here is my analysis:
[edited for clarity]

What I am seeing is that if an account starts with a small balance and has significant deposits over time, then changes in security prices have a much larger impact on the Growth of $10K than they should. Consider this simple example:

An account has a balance on Dec. 31 of $10,000 in cash

On Jan.1 of the following year, I deposit $5,000

Later in the year I purchase 50 shares of a stock @ $100 per share for a total of $5,000, using cash from the account.

The share price goes up to 150 and stays there for the rest of the year.

Ending balance is $10,000 + 50*150 or $17,500.

Looking at the year as a whole, the total investment is the $10,000 starting balance plus $5,000 or $15,000 and I end up with $17,500 for an increase of 16.7%, so I would expect the Growth of $10,000 to show an ending balance of about $11,670. This agrees with the IRR calculation in the Investing Performance report, but Quicken says my Growth of $10K has gone to $12,500 or 25%

For a more extreme example, say everything is the same but the account starts the year at $1,000 rather than the $10,000 in my first example. After the Jan 1 deposit of $5,000, I have invested $6,000 and with the stock purchase it ends at $8,500 for a gain of 41.7%, so the Growth of $10K should show about $14,170, which also agrees with the Investment Performance report.  But now the Growth of $10K says it has gone up to $35,000 or 350%.

It appears that something is wrong with Quicken's calculation.

In researching these calculations, I have come across the "time weighted return," the "Simple Dietz method" and the "Modified Dietz Method" as ways the calculations are typically performed, but Quicken's Growth of $10K results do not appear to match any of these. This Wikipedia article

https://en.wikipedia.org/wiki/Time-weighted_return 

provides a good explanation. 

I believe the Growth of $10,000 graph would be much more useful and realistic if it used one of these standard calculations, and did not overstate gains and losses when there have been contributions to the account.

Some might argue that it has always been that way so why change it now, but I would contend that it has always been wrong and Quicken should fix it.

Ps56k2

What version are we discussing -

are these $10k graphs only avail in - Premiere - as I'm not seeing this in - Deluxe -

What is the menu path to arrive at these....

Jim_Harman

This is the Growth of $10,000 graph on the Investing > Performance tab.

You should be able to use it to see how the performance of your investments compares to selected indexes, but because of the issues discussed above, it calculates your performance incorrectly when you have made significant contributions to an account.

I have a real life account that demonstrates this issue clearly, where the account started a year with a small balance and I made a significant deposit early in the year and purchased an index fund. Both the fund and the index rose during the year, but the graph vastly overstates my performance for the year compared to the same index.

I believe the basic graph is available in Deluxe and up, and there is an additional "Buy and Hold" option in Premier.

halhollis

> @ps56k said:
> What version are we discussing - are these $10k graphs only avail in - Premiere - as I'm not seeing this in - Deluxe -
> What is the menu path to arrive at these....

Premiere, R26.21
Investing -> Performance