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Investment Performance Incorrect

Jamesnk1995

My issue is that the Investment Performance Report and the Performance dashboard show inflated returns. Looking at the Investment Performance YTD report, the return column shows the full market value of my IRA accounts instead of the actual return. Is there a way to fix this?

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Jim_Harman

The Investment Performance Report does an annualized IRR calculation. For a shorter period like YTD as you have chosen, it assumes that the performance over the period you have chosen will continue at a compounded rate for a full year. Your investments are up by about 8.5% YTD and we are about 25% of the way through the year so the calculation looks correct.

Try changing the date range to Annual and Current year and you should see a more realistic performance projection. This will assume that the performance will be flat for the rest of the year.

Or set the date range to Last 12 months and you will see your actual performance for 3/28/23 through 3/27/24.

Bob_L

IRR looks at the cash flows during the period in question, where the initial cash investment is ther market value at the beginning of the period, and the final cash flow is the final market value at the end of the time period(as if it was cashed out then). That is why the full value shows under the column heading "returns".

amartignone

Qustion: Since the Investment Performance report makes a cash flow calculation for the IRR, is considering the transfers of cash in and out as part of the performance, so if you funded the account during that period, it shows a higher IRR, when it actually was a deposit not related with the stocks performance. Is that right? or the IRR is only the investments performance per se without taking into consideration additions or withdrawls?

or that value (how well or bad the whole portfolio does itself) is the one given by "Change in Market Value" of the Investing Activity Report?

Bob_L

Think of IRR like a bank account. That is deposits to the account are investments, I.e. negative cash flows, and interest credited is a positive cash flow. Deposits would not increase the IRR.

Usually cash flow analyses are constructed something like this:

Year 0 investments as a negative number

Year 1 reinvested dividends cancel out as a both a positive and negative

Year 1.5 additional investment as a negative number

Year 2 market value if still held, or if sold a positive cash value equal to the sales value.

Edit. How you structure the IRR of course also matters. If you run the IRR for a security, as opposed to the entire account, then deposits to the account, not the security, from outside it are not included.

q_lurker

Since the Investment Performance report makes a cash flow calculation for the IRR, is considering the transfers of cash in and out as part of the performance, so if you funded the account during that period, it shows a higher IRR, when it actually was a deposit not related with the stocks performance. Is that right? or the IRR is only the investments performance per se without taking into consideration additions or withdrawls?

@amartignone

My spin on this: The user defines the 'universe' of investments of which the performance is to be computed. That 'universe' might be one account or several accounts or all accounts. It might be one security, several securities, or all securities. It might or might not include 'cash' (the no security - includes cash selection). From that definition, a starting size (Beg Mkt Val) and ending size (End Mkt Val) are determined such that it can then be calculated how much bigger or smaller that universe got over the chosen period of time. Transactions that represented value taken from or added to that universe are also factored in.

So suppose for example, you started the year with an IRA of $10,000 (Beg Mkt Val = beginning size of universe), you added a $1,000 contribution during the period (something from outside the universe was added to it), and the account ended the year at $12,000 (End Mkt Val = ending size of universe). The IRR calculation would show about a 10% average annual return. The actual value would depend on exactly when the contribution was made. Make the contribution really early in the year, the performance would be closer to 9% since it is more like $11,000 grew to $12,000. Make the contribution late in the year becomes closer to $10,000 growing to $11,000 then the added $1,000 making the $12,000 total, for a 10% return.

Any changes made internal to the universe do not change the calculation other than they might affect the end size. If you make the contribution, invest that wisely and it grows, that growth impacts the ending value and the overall performance.

Funding an account during a period does not automatically mean a higher IRR value. Fundamentally, the calculation is downplaying the effects of contributions and withdrawals, but I cannot say it is not taking them into consideration.

Also worth noting: If the defined time period is short (less than a year), the calculation extrapolates that short period performance out for a full annualized year. Crudely, if you get a 3% performance for a month, that extrapolates to a 36% return as an annualized value - and that is frequently very unrealistic. So be cautious about performance computed for short periods of time.

A simple Excel example:

Vitali Z Coppersmith

IS there any way to make it show the actual rate of return for each period, such as a month. without showing it annualized?

Jim_Harman

Is there any way to make it show the actual rate of return for each period, such as a month. without showing it annualized?

The short answer is No, the Investment Performance Report is only useful for intervals of 1 year or more.

But if you want to see the percentage gain or loss shorter periods without compounding or annualizing, you should be able to export the report to Excel and have it compute (Returns / Investments) - 1.

Disclaimer: This looks correct for my data but I have not tested it exhaustively.