### Figuring out annual total return

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I know I should be able to figure this out but I need help:

Clients invests 100,000 on 6/1/05

adds 100,000 on 1/1/06

total value now is 213,000.

what is the annualized total return?

scrim

[quote=scrim67]

I know I should be able to figure this out but I need help:

Clients invests 100,000 on 6/1/05

adds 100,000 on 1/1/06

total value now is 213,000.

what is the annualized total return?

scrim

[/quote]

Anybody wanna bet that Maybeeeeee will know?

Scrim, there are a few rate of return calculators available on the net or just use a business calculator that give you options whether an additional investment is done on a weekly, monthly or yearly basis. Therefore, I just inputed 100k initial investment, 100k additional investment and the time period roughly 10 months, I just adjusted the annualized return until I got your number of 213k which gave an annualized return of 8.13% and holding period return of 6.49% for 10 months. I did not give any weighting to whether the 100k was done in month 2 or month 10. The only reason it would matter if we knew the stated amount of interest or return and we were determining the ending total value and to figure out the compounded annual return.

Scrim this isn’t that simple of a calculation. Without a financial calculator it is nearly impossible over long periods of time. Look up the Modified Dietz Formula on the web for the actual function. A TI BA-II Plus or an HP Financial Calculator will allow you to calculate time-weighted returns.

There is only one simple way to do this.

Determine monthly simple returns, month to month. Net out any contributions or withdrawals. This will make the most sense to your client and to you.

In other words - get out of the box!

Your need to use the Time Weighted Return to caclulate portfolio

performance such as this. I would use an HP, but there is a long

hand formula you can use:**r(T) = prod[MV(t+1)/{MV(t)+C(t)}] - 1**

[quote=rightway]Your need to use the Time Weighted Return to caclulate portfolio performance such as this. I would use an HP, but there is a long hand formula you can use:**r(T) = prod[MV(t+1)/{MV(t)+C(t)}] - 1**[/quote]

Is are you sure of that formula? They're a lot like Chinese in that they all look alike.

Just an aside, even an HP is not going to be perfect. In order to calculate the accurate yield you need to keep track of every individual inflow of investment income because once you have collected that cash you no longer have as much invested so your rate of return is higher than it appears if you divide by a constant such as $100,000.

I know a guy with way too much time on his hands who built an Excel spreadsheet with every cash event in the portfolio. It seems like he was actually figuring out how much was invested every day and using that information to come up with what I guess is a weighted average daily investment.

Why not just tell you client, "Look, jackass, you have more than you started with and that is good" and leave it at that? Injecting the word jackass is optional and may not be effective.

Perhaps Maybeeee can look it up in Miss Manners and report back.

**Is are you sure of that formula?**

"Is are" be a phrase used in Slovinia. It is a lot like, "right opposite."

Look it up.

[quote=ezmoney]it's not correct. the right number is 5.4%[/quote]

How could that possibly be?

The portfolio is worth 13,000 more than has been put into it and it's been less than a year.

If it had been a year, and all 200,000 had been invested for the full time the return would be no less than 6.5%.

You are in the financial business and things like that don't just scream off the paper as being not only inaccurate, but not even possible?

I've got an HP10B, and if I could find my instruction manual, I could pin this number down for you. the 10B and the 12 that someone mentioned earlier will allow you to put in multiple deposits at various times and calculate the IRR.

I'm too lazy for that, so I just do a quick and dirty average balance for the time period and use that as the denominator, with the gain as the numerator. That gives you a rough period return, which is easy to annualize.

Using your example, I figure that you have $100,000 on deposit for 214 days and $200,000 on deposit for 77 days. That gives you an average on deposit of $126,460.49. If you divide $13,000.00 by that number, you get 10.28% period return. You can annualize that by dividing 10.28% by 291 days and multiplying by 365 days. That gives you an annualized ROR of about 12.9%. There are some flaws in the calculation, but that kind of quick and dirty analysis is understandable and acceptable for most clients and is good enough for me to leave the 10B in it's protective pouch. Besides, I get quarterly performance reports automatically out of the LPL system and the clients get them too, so this has become a non-issue fo me.

OK, math majors...go ahead and correct me.

[quote=Indyone]

I'm too lazy for that,

[/quote]

There's the motto of just about everybody who is under age 45.

[quote=Big Easy Flood][quote=Indyone]

I'm too lazy for that,

[/quote]

There's the motto of just about everybody who is under age 45.

[/quote]

So where's your solution?

Indy, were you a former accountant at Enron? Annualized return of 12.9%? If you only used the 100k at 12.9% that is $12,900 or $100 short of the $13,000 he ended with and that’s using 200k. And you lost me on the average deposit, what did he invest in equities or mutual funds, or in your case a passbook savings account. And if your clients accept those numbers they need their head examined…“flaws in the calculation” now that’s understatement. Break out the HP why don’t you.

The reason that Indy may be very close is found in this thinking.

Any positive return earned in less than 1 year will result in a higher percentage if you annualize it.

Man it's scary to think that this many lightweights are in the biz.

[quote=Big Easy Flood]

The reason that Indy may be very close is found in this thinking.

Any positive return earned in less than 1 year will result in a higher percentage if you annualize it.

Man it's scary to think that this many lightweights are in the biz.

[/quote]

Will result in a LOWER percentage once you stretch it out over twelve months instead less than twelve.

It's late and I have to get a drink.