Investment Performance

Quicken Windows Subscription Member ✭✭
edited October 2023 in Investing (Windows)

Quicken uses IRR for performance which is not appropriate for public securities. It should use Time Weighted Return. I find it is way off from my broker statements. Does anyone use any external software to track performance?

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  • Quicken Windows Subscription SuperUser ✭✭✭✭✭
    Answer ✓

    @dpags this is an interesting discussion.

    After thinking more about this, I think Quicken's Growth of $10,000 chart on the Investing > Performance page is supposed to present the time weighted return of the selected accounts and securities. Unfortunately it appears that the calculation is flawed and the chart overstates the impact of cash flows rather than removing them. I had an Idea post on this issue but it has been closed because it only received a few votes. The content of that Idea is below.

    ===================

    The Investing > Performance > Growth of $10,000 graph is potentially very useful, but the current calculation causes incorrect results if there are significant purchases or sales during the period. These errors are largest if there is a large purchase or sale near the start of the period.

    Consider this simplified example:

    An account starts 2021 with 14.4271 shares of the S&P 500 index fund VFIAX, conveniently worth $5,000 at the share price of $346.57.

    We purchase an additional 14.4271 shares on 1/3/21, also at $346.57, bringing the account total to $10,000.

    We ignore any dividend payments, so there are no further transactions for the year. At the end of the year, the share price has increased to $439.83, bringing the account total to $12,690.94. The account's Transaction List looks like this:

    src mbaw93st88k4.jpg



    If I set the date range for the Growth of $10,000 so that it starts after the second purchase, the graph mimics the S&P 500 price index exactly, as it should:

    fcecuydrvsbz.jpg



    If I set the date range so it starts just before the second purchase, the graph is dramatically different:

    fpt8ifxg2uqw.jpg



    The graph shows a gain of about twice what it actually was. Apparently Quicken's calculation is using the starting value of the account to compute the gain rather than the value at the start of each period. 

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  • Quicken Windows Subscription Member ✭✭
    Answer ✓

    I agree with your logic and your calculations. Thanks for all of your help.

  • Quicken Windows Subscription Member ✭✭
    Answer ✓

    Thank you for your thoughts. I agree that for the investor IRR might be appropriate for viewing your performance however I have three different managers and I manage some money myself. In comparing how I am doing to the managers and in using the manager report as a basis for their returns I feel that TWR is more industry standard. In addition, it helps in comparing the returns to the benchmark that I have established. Thanks for your thoughts though. This is all very helpful.

Answers

  • Quicken Windows Subscription SuperUser ✭✭✭✭✭
    edited September 2023

    Time Weighted Return is a good measure of the historic performance of a security or fund manager, and thus the fund itself. It ignores the amount and timing of inflows and outflows, which are not under the manager's control.

    IRR (what Quicken calls Average Annual return) is a good measure of your portfolio's performance, because it takes into account the timing of your cash flows and trading.

    See for example

    Site faviconWhat Is The Difference Between Time Weighted Rate Of Return Calculation And IRR?

    The Return (%) XXX columns in Quicken's Investment > Portfolio views show a security's performance over various time periods, independent of the timing of any of your purchases or sales. Note that this data is downloaded from Quicken's quote provider. It is supposed to be as of yesterday's close, but the data is sometimes missing or out of date. It assumes any dividends and other distributions are reinvested.

    To track your personal performance accurately, you must accurately record all the cash flows for your securities, including purchases, sales, and dividends. Quicken is well suited for this, because in theory it has all the data it needs to make the IRR calculation.

    One potentially confusing aspect of the IRR calculation is that it is annualized, so for periods of less than one year it assumes the performance will continue at the same rate for a full year. So if you bought a security in January and it is up 10% after 6 months, the IRR will be about 20%. Thus Quicken's "Avg. Annual Return YTD" figures will often overstate the the YTD gains or losses published elsewhere.

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  • Quicken Windows Subscription SuperUser ✭✭✭✭✭

    To answer your question about external software, for several years I laboriously entered all of my investing transactions into Morningstar's Portfolio Manager. Its "Personal return" calculations matched Quicken's Avg. Annual Return figures in the Portfolio views and the Investment Performance Report exactly.

    The Avg Annual Return figures also match Excel's XIRR calculation.

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  • Quicken Windows Subscription Member ✭✭

    Thanks for the quick response Jim. As you note, IRR is a measure of cash flows. As such it is more appropriate for long term non public investments that have contributions and distributions over time. It is useful for since inception performance over time but as you note it is not really appropriate for period returns, especially under one year. When comparing the Quicken returns to the custodian statements and to my back of the envelope period returns I get very different numbers. I am looking for a system that can do TWR calculations.

  • Quicken Windows Subscription SuperUser ✭✭✭✭✭
    edited September 2023

    I have some comments on your statements above

    • "IRR is a measure of cash flows. As such it is more appropriate for long term non public investments that have contributions and distributions over time" - That is a good description of my portfolio and a performance measure that is useful for me.
    • "it is not really appropriate for period returns, especially under one year" - For any period longer than one year, the IRR is the annual rate of return that a bank account with daily compounding would have needed to match the performance of my portfolio, given the same cash flows. I find that useful. For YTD returns, you can set Quicken's end date to 12/31 and it calculates an annualized rate of return, assuming the performance will be flat for the rest of the year. I find that useful too. For other short time periods, the ROI (%) column in the Portfolio views is usually valid. You can set the ROI starting date in Options > Portfolio preferences.

    How do you think Quicken should calculate the time weighted return for a typical user's portfolio, which does have cash flows during the analysis period?

    One way would be for it to look at the holdings at the beginning of the period and assume there is no further trading, contributions, or distributions during the period. If I understand it correctly, that is what the "Buy and hold" option in Quicken's Investing > Performance > Growth of $10,000 chart does. The option is available in Premier and up but has some limitations. See this discussion

    'Buy and Hold' showing $0 in investment performance tab

    KnnNike

    The time weighted return of publicly traded securities independent of your cash flows is in the Return (%) columns in the Portfolio views, if the downloaded data is correct.

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  • Quicken Windows Subscription Member ✭✭

    Here is a portfolio where the TWR is 4.00% different than the IRR. I had to attach this as a pdf as Quicken would not let me do an Excel file. Thanks for your responses.

    TWRvsIRR.pdf
  • Quicken Windows Subscription Member ✭✭✭✭

    I might be really missing the point here, but it seems to you are trying to mix metrics that are for completely different purposes. Note that the security industry tries to push these as "what to expect", and as such I can see the confusion, but to me that is unrealistic.

    With very few exceptions individuals do not invest in the way that TWR is measuring. As such the number isn't useful for telling how good your investments are doing. The only purpose I see for TWR is to use it to compare to other funds using their TWR numbers.

    TWR purposely takes your inflows/outflows out of the picture. That's great for telling if you picked a good or bad security, but it gives one a false sense of if their investing is good or bad. One can pick all the right securities, but if they trade them at the wrong times, their portfolio will do poorly.

    Bottom line is what are you using Quicken for, to judge what securities are the best, or if your investments are doing good or bad. I believe Quicken is more tailored to the later.

    About the only purpose I can see for comparing TWR to IRR is that maybe you might see how you can better invest to get as close as possible to the TWR number which would most likely be highest return possible with the security (there is a reason funds use that number; they want to look as good as possible.).

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    This is my website: http://www.quicknperlwiz.com/
  • Quicken Windows Subscription Member ✭✭

    Thanks for the response Chris. Yes, I am trying to compare my portfolio returns to each other. I believe that TWR is a better measure of period returns than IRR and allows you to compare managers to each other. Thanks.

  • Quicken Windows Subscription SuperUser ✭✭✭✭✭
    Answer ✓

    @dpags this is an interesting discussion.

    After thinking more about this, I think Quicken's Growth of $10,000 chart on the Investing > Performance page is supposed to present the time weighted return of the selected accounts and securities. Unfortunately it appears that the calculation is flawed and the chart overstates the impact of cash flows rather than removing them. I had an Idea post on this issue but it has been closed because it only received a few votes. The content of that Idea is below.

    ===================

    The Investing > Performance > Growth of $10,000 graph is potentially very useful, but the current calculation causes incorrect results if there are significant purchases or sales during the period. These errors are largest if there is a large purchase or sale near the start of the period.

    Consider this simplified example:

    An account starts 2021 with 14.4271 shares of the S&P 500 index fund VFIAX, conveniently worth $5,000 at the share price of $346.57.

    We purchase an additional 14.4271 shares on 1/3/21, also at $346.57, bringing the account total to $10,000.

    We ignore any dividend payments, so there are no further transactions for the year. At the end of the year, the share price has increased to $439.83, bringing the account total to $12,690.94. The account's Transaction List looks like this:

    src mbaw93st88k4.jpg



    If I set the date range for the Growth of $10,000 so that it starts after the second purchase, the graph mimics the S&P 500 price index exactly, as it should:

    fcecuydrvsbz.jpg



    If I set the date range so it starts just before the second purchase, the graph is dramatically different:

    fpt8ifxg2uqw.jpg



    The graph shows a gain of about twice what it actually was. Apparently Quicken's calculation is using the starting value of the account to compute the gain rather than the value at the start of each period. 

    QWin Premier subscription
  • Quicken Windows Subscription Member ✭✭
    Answer ✓

    I agree with your logic and your calculations. Thanks for all of your help.

  • Quicken Windows Subscription SuperUser ✭✭✭✭✭

    I too have found this discussion valuable and informative. In that regard, I also found the Investopedia article on TWR useful to understanding. https://www.investopedia.com/terms/t/time-weightedror.asp#:~:text=The%20time%2Dweighted%20return%20(TWR,inflows%20and%20outflows%20of%20money.

    Selected quotes from that source:

    The TWR measure is often used to compare the returns of investment managers because it eliminates the distorting effects on growth rates created by inflows and outflows of money. 

    Because investment managers that deal in publicly traded securities do not typically have control over fund investors' cash flows, the time-weighted rate of return is a popular performance measure for these types of funds as opposed to the internal rate of return (IRR), which is more sensitive to cash-flow movements.

    But even with all that, I’ll choose to disagree that the IRR calculation is limited in value to investments not publicly traded. Nor do I see it as a pure cash flow measurement. Also, for me within Quicken, the IRR value is more meaningful, though perhaps there should be room for both.

    The basics of the IRR calculation are what was the starting value, what was the ending value, and what amounts went in and out - and when. Those starting and ending values are not (in my opinion) 'real' cash flow, though I recognize the premise of the investor having chosen to have dollars invested in a particular manner on any chosen starting date and similarly having chosen to end the period with dollars invested in some specific manner. Those are certainly "cash flow"-like decisions.

    The TWR sales pitch suggests I can put $10,000 into manager-X's hands and see what he has done with it at the end of some period. Indeed, I could give each $10,000 to Manager-X, Manager-Y. What is the failing of using the IRR calculation on the same basis. Indeed, I might compare those two managers against the same sized investments in Apple and Berkshire Hathaway.

    The pitch for TWR is that inflows and outflows are ignored. For my purposes and needs, I want those effects included. In essence, as I use Quicken on the investment end, I am the manager and I want a measure of my performance. If I am market timing or dollar cost averaging or randomly dropping in or removing cash, that is all part of my return. If I am (or a manager working for me is) moving between cash, equities, bonds, US, International, emerging markets, commodities, etc., I want the influences of those cash-flow decisions included in the performance values QuIcken gives me. If I want an measure on a dividend paying security, I don't want that cash flow aspect ignored. If I am regularly adding to an IRA, that cash - inflow needs to be a part of the picture.

    Where such cash flow may distort and thus TWR may be more useful is when large deposits or withdrawals might be made. The hypothetical that comes to my mind would be receipt of an inheritance. Large in this context is obvious relative to the overall size of the portfolio being evaluated.

  • Quicken Windows Subscription Member ✭✭
    Answer ✓

    Thank you for your thoughts. I agree that for the investor IRR might be appropriate for viewing your performance however I have three different managers and I manage some money myself. In comparing how I am doing to the managers and in using the manager report as a basis for their returns I feel that TWR is more industry standard. In addition, it helps in comparing the returns to the benchmark that I have established. Thanks for your thoughts though. This is all very helpful.

This discussion has been closed.

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