calculating return based on appreciation, dividends, and interest, but excluding deposits

meeotch

Is there a report or simple method to calculate the return on my investments and cash accounts, but exclude any external deposits? So essentially, ignoring my salary and any money added into my net worth, some of which sits in my cash accounts, but some of which gets transferred to my investment accounts and subsequently invested? That is, return derived solely from interest/dividents/reinvetments/appreciation?

q_lurker

The flaw in your question is that to get an accurate performance measure, you need to consider all the deposits you have made. Ignoring them will give you bad information. 

That said, I understand your concern. Seeing your account bigger by $1000 does not mean much if you deposited $950 of that from other sources.  To that extent, you want to “ignore” your deposits. 

The tool I suggest you use is the investment performance report which calculates an Annual Average Return value considering dividends, growth, etc. and the timeliness of deposits you have added to the account. Average Annual Return values are also available in portfolio views. 

meeotch

Thanks for the reply. And yes, you are correct: an accurate answer would include the interest made on my salary from the time I deposited it, but not the salary deposit itself.

I was under the impression (from other threads here and elsewhere that I unfortunately don't have links to right now) that none of Quicken's built-in metrics correctly calculated what I describe. ROI, IRR, AAR, etc. Though I admit, I haven't done the research to fully understand the difference between them. A link to a primer that describes those differences is welcome.

Does the Investment Performance Report also include cash accounts? If not, it seems I'm back where I started - having to calculate the AAR of cash deposited separately, some of which might be converted into investments throughout the year, then figuring out how to combine that with the AAR from the Investment Report. Doesn't seem like an easy task.

I suppose I could total all the external deposits for the period, subtract that from net worth at the end of the year, and divide by net worth at the beginning of the period.

What I'm really looking for is: I have chosen a certain asset allocation (stocks/bonds/cash/etc.), based on an expected return for retirement planning purposes. I want to know if my allocation is leading to the greater/lesser returns than I assumed. A historical graph would be ideal.

meeotch

Complicating all of the above is that I make heavy use of Savings Goals - which I believe affect net worth in quicken? But my asset allocation largely ignores those goals, since it's all still my money. With the exception of some of them - e.g., an emergency fund. But I guess if I could resolve the above, I'd be happy with a return figure that excluded all goals.

meeotch

Shoot - there appears to me no edit function on these posts. One thing that I wanted to add to my first reply above is that cash accounts also experience withdrawals to external destinations (spending), which would also have to be "ignored".

So, really, the simplest way to put it is: calculating the interest-based returns on cash accounts, and then integrating that with the dividend/appreciation-based return on investment accounts. Taking into account the fact that deposits/spending happens irregularly over time.

Sherlock

meeotch said:

Thanks for the reply. And yes, you are correct: an accurate answer would include the interest made on my salary from the time I deposited it, but not the salary deposit itself.

I was under the impression (from other threads here and elsewhere that I unfortunately don't have links to right now) that none of Quicken's built-in metrics correctly calculated what I describe. ROI, IRR, AAR, etc. Though I admit, I haven't done the research to fully understand the difference between them. A link to a primer that describes those differences is welcome.

Does the Investment Performance Report also include cash accounts? If not, it seems I'm back where I started - having to calculate the AAR of cash deposited separately, some of which might be converted into investments throughout the year, then figuring out how to combine that with the AAR from the Investment Report. Doesn't seem like an easy task.

I suppose I could total all the external deposits for the period, subtract that from net worth at the end of the year, and divide by net worth at the beginning of the period.

What I'm really looking for is: I have chosen a certain asset allocation (stocks/bonds/cash/etc.), based on an expected return for retirement planning purposes. I want to know if my allocation is leading to the greater/lesser returns than I assumed. A historical graph would be ideal.

For a primer on Quicken's investment calculations, you may want to review the Help documentation available on the topic: https://help.quicken.com/display/WIN/Tell+me+about+key+investment+performance+calculations+used+in+Quicken

The Investment reports may only include accounts set with an Account intent of Investment or Retirement.  Which means, to include a Cash account in an Investment report, you may first need to reset the Account intent of the Cash account: open the Cash account register, press Ctrl + Shift + E, select the Display Options tab, select Investment in the Account intent pull-down menu and OK

You might find the Investing Activity report to be useful.

Jim_Harman

You can edit your posts by clicking on the 3 dots at the top right of the post. This may only work for a limited time, depending on how many forum points you have accumulated. 

As @q_lurker has said, I think the most useful metric in Quicken for your purposes would be Average Annual Return, which uses an Internal Rate of Return (IRR) calculation. This is essentially the annual interest rate a savings account with daily compounding would require to match the performance of the selected investments, given the same cash flows. The timing of deposits and withdrawals is included in the calculation, but the calculation also includes the performance of the investments you held during the period.

Of course retirement planning requires many more inputs than just your investing performance, some of which are un-knowable:
-- future inflation rates
-- future tax rates
-- your retirement income from other sources, such as Social Security and pensions
-- your living expenses in retirement
-- how long you will live

You might want to look at Quicken's Lifetime Planner, which lets you make assumptions about these factors and does a pretty good job of predicting your future net worth based on these assumptions. 

Jim_Harman

Also, I don't think it is possible to come up with an accurate number for what your performance would have been if you had not made any deposits or withdrawals. The answer depends on what if any investments you bought with the deposits and what you sold to fund the withdrawals. For example, say you received a large inheritance during the period. Your closing balance would be very different depending on whether you kept the money in cash or bought AAPL. 

But if you really want to see what your historical returns would have been if you had not made any deposits or withdrawals, you might find a mutual fund that has a similar asset allocation target and look at its "Growth of $10,000" chart. Morningstar.com is a good source for this data.

q_lurker

meeotch said:

Thanks for the reply. And yes, you are correct: an accurate answer would include the interest made on my salary from the time I deposited it, but not the salary deposit itself.

That really wasn't what I was saying.  I was suggesting that if you started with $1000 in the account and got $25 of interest or dividend, then added another $1000 and after that got $40 of interest (or dividends, or growth), you cannot ignore the additional deposit in determining the broad performance.   

Does the Investment Performance Report also include cash accounts? If not, it seems I'm back where I started - having to calculate the AAR of cash deposited separately, some of which might be converted into investments throughout the year, then figuring out how to combine that with the AAR from the Investment Report. Doesn't seem like an easy task.

I suppose I could total all the external deposits for the period, subtract that from net worth at the end of the year, and divide by net worth at the beginning of the period.

I try not to delve into the area of giving financial advice - I am not so qualified.  I will suggest I don't think many would suggest that looking at "returns" or investment performance with net worth as a baseline is a good (meaningful) approach.  Home ownership, cars, boats, second homes, student loans, mortgages, and your noted cash spending accounts all affect net worth but can have greatly different 'performance' qualities.

In that vein, you are right. Quicken does not consider those 'other' accounts in any of its investment performance determinations.

What I'm really looking for is: I have chosen a certain asset allocation (stocks/bonds/cash/etc.), based on an expected return for retirement planning purposes. I want to know if my allocation is leading to the greater/lesser returns than I assumed. A historical graph would be ideal.

I'll first reiterate that cash for investment purposes and related asset allocation should be separate from day-to-day living / spending cash.  

From there, you are now talking about purely investment accounts (stocks/bonds/cash/etc.).  That is where several of us have pushed the average annual return figures as generally fair measures of returns that will include all the effects of dividends, interest, and growth with due consideration toward whatever regular or irregular additions you make to those investment accounts. 

In particular, the Investment Performance Report would be well tuned toward separately computing the annualized return rates you are getting for stocks vs bonds vs cash vs anything else).  Those returns should generally be fair comparisons to the 'expected returns' in your separate retirement planning model (Subtotal by Security Type).  Examples:  In 2020, my Bonds produced an AAR of 3.1%, my Bond Funds produced 6.3%, and my US Equities produced 22.8%.  Across more than 20 years of data, my AAR for US Equities is 10.6%.  (NB:  I do more specific security typing than Quicken uses as defaults.)  

meeotch

Thanks for all the replies. And you're correct - I did receive an inheritance, in additional salary, gifts, and various other income. You're also correct that I do want to know the return on those amounts, I just don't want to consider those amounts "part of the return". So my original question was slightly misformulated.

It does sound like an IRR is what I'm looking for. As mentioned, I'm think I've ready elsewhere that there were problems with Quicken's IRR calculation, but I'll do some more digging. It's interesting that Quicken allows you to tag a cash account as investment - though I assume that moves it to the Investment section of the sidebar, which is unfortunate.

As for retirement plans - I'm fairly certain I've got all those other pieces in place. Using FIREcalc and various other retirement calculators, I'd settled on an amount and rate of return that I felt comfortable with. The missing piece is knowing whether I'm hitting that rate.

Currently, if I look at the AAR columns in the Performance report on the Investing tab, I see N/A in the 1-year and 3-year AAR columns, and nearly 300% in the 5-year column. So clearly, there's something wrong, as my holdings have been 60/40 stocks/bonds for some time. There are some positions that I've completely exited, and some investment accounts that were closed/opened during that time - but I'd have thought that would be correctly accounted for in the AAR calc.

I use primarily Bought/Sold/Div/Reinv/Xin/Xout investment transaction types. But I'm noticing some Added and Removed transactions in there too. Perhaps those are the culprit? In at least one case, I believe they are the result of a fund being discontinued by the provider, and the assets transferred to a different fund (not sold/bought - but simply rolled over. The provider (Fidelity, in this one case) did seem to do this by individual lots, but I'm not sure if the cost basis was correctly preserved - or even if that's possible in Quicken.

meeotch

q_lurker - looks like our last posts crossed paths, because we were composing them at the same time. You are correct that I have other holdings, most significantly a small building that I own. (Which I definitely consider part of my investments, as it was purchased with money that would otherwise have been in stocks/bonds, and some day I will sell it and use that money to live off of.)

I do have significant cash in my Spending/Savings accounts. I consider the Savings accounts to be part of my "investment" holdings, in the sense that I'm trying to take a total return approach toward retirement. So my allocation isn't really 60/40, it's X/Y/z/w... X and Y being traditional stocks/bonds, z being cash, and w being physical assets.

The w could presumably be represented by an Asset account that I periodically adjust for appreciation. Though I'm not sure what type of transaction that would be, and whether it would be correctly included in an investment report as contributing to return.

Cash seems more difficult: I'd have to track individual deposits, and allocate the interest made on those deposits over time. Way more work thank I'm willing to do. Though I suppose the cash accounts are dwarfed by the others, and could be excluded without distorting the results too badly.

From the discussion above, it sounds like the path of least resistance is to figure out how to correct my traditional investment accounts so that the AAR column is not wildly inaccurate, and then figure out how to combine that with appreciation on my building in a sensible way over time.

meeotch

Damn - the three dots menu seems to have disappeared for this thread. Obviously that's "more work *than* I'm willing to do", above.

Jim_Harman

To clean up the AAR calculations, I suggest you run an Investment Performance Report grouped by Account and look for wildly large numbers in the Investments and Returns columns.

Things that can cause problems are:
-- Mutual fund conversions that were entered more than a few years ago. This problem has been resolved but you may have to delete and re-enter the conversion transactions. Also make sure that both the old and new securities are included in the customization.

-- Spin-offs, mergers, and acquisitions - make sure these are entered correctly and all affected securities are included. 

  

Jim_Harman

For information on treating real estate as part of your investing portfolio and asset allocation, see this discussion
https://community.quicken.com/discussion/7894274/easy-ways-to-track-land-investment-with-rent-as-an-asset-class-in-quicken-premier

q_lurker

meeotch said:

q_lurker - ... 

From the discussion above, it sounds like the path of least resistance is to figure out how to correct my traditional investment accounts so that the AAR column is not wildly inaccurate, and then figure out how to combine that with appreciation on my building in a sensible way over time.

In addition to identifying 'errors' that might throw off AAR figures (Jim's comment), it is also worthwhile to understand the premise that underlies Quicken's calculation of same.  I'll offer my perspective built on my years of use rather than any inside knowledge.  I'll comment mostly from the side of the "Report" although the portfolio views show the same processes apply.  

One point is to recognize the importance of time.  If you ask for the AAR using a short time period (think YTD when it is only Feb or March), the calculations essentially extrapolate from that short time period to a year long value.  A good (or bad) 1st quarter can extrapolate to a great (or terrible) year.  Is that reasonable?  On the other hand if in February you ask for the complete year (Jan - Dec) value, the calculations essentially flat-line for the remainder of the year.  You've gotten all your performance and nothing else changes.  (Assuming you have no 'future" prices in the records).  Either case can be meaningful or deceptive depending on one's underlying understanding.  As the time span approaches or exceeds a full year of date, the quality of the extrapolation improves.

One metaphor for the calculation I have visualized is as a universe.  The user defines a universe or collection of assets.  These might be accounts, groups of accounts, individual securities, groups of securities, or some combination thereof.  Over whatever time period is involved, the universe grew or shrank, money (value) may have been added from outside, or money (value) may have been removed from that universe and sent somewhere outside.  Quicken is then looking at 'cash flow' (really value flow) in and out of that defined universe and at the change in the size to determine the AAR.  Those are the transactions reported in the cash flow detail of the Investment Performance Report.

Suppose a security paid a cash dividend.  Is that 'cash' included in the universe?  If so, it just represents an increase in size (ending value) of the universe.  If not, it would be a 'return', something removed from the universe. 

One might at some point look for an AAR of one's entire investment portfolio.  Transfers from a salary to a 401k and similar would show as an added investment (addition to the universe).  RMD transfers from an IRA to a checking account and similar would show as a return (a withdrawal from the universe).  Most transactions would be internal to the universe just altering its size (hopefully upward).  Those would not be reflected in the cash flow details of the report.  

At another point, one might ask for the AAR by security type.  That aforementioned cash dividend might appear as a withdrawal from the 'Equity' universe and an addition to the 'Cash' universe.  Some later transaction might appear as withdrawing from the 'Cash' universe and adding to the 'Equity' or 'Bond' universe.  You end up getting AAR values on each of these smaller collections within your overall portfolio.

Hope this helps.