Calculating Performance

[bovie]

If you're more visual, it's as simple as this little example.

Once you get the hang of it, you can fine-tune, sub-classify, create annual splits, track annual flows, etc., to get as much data out of it as you like.

[bovie]

So to track assets class and overall portfolio performance my understanding now is to simply maintain an XIRR table of any in/outflow across all accounts for total performance and then separate XIRR tables with in/out flow for each asset class? That seems straight forward enough and really not hard to implement, just plug in date and amount.

Really appreciate the help as someone slowly working on getting a financial plan established as we will be done with residency this summer.

You can do it all in a single table. But yes, once you have the concept and understand what the function is doing, it is really quite straightforward.

A simple example:

Column A: cash flow dates
Column B: cash flows for VTSAX
Column C: cash flows for VFIAX
Column D: cash flows for VBTLX
Column E: cash flows for VMFXX
Column F: sum of cash flows for columns B-E

Then the bottom row for each of those columns should be the current date (A), current value of the holding (B-E), and current sum of all holdings (F).

Important: the current value of the holdings in the final row should be expressed as a negative number/outflow, assuming you use positive numbers for inflows.

Then just add another row to the bottom and run the XIRR function for all columns.

This will give you annualized returns for each of the individual holdings as well as the portfolio overall.

[Eluna]

So to track assets class and overall portfolio performance my understanding now is to simply maintain an XIRR table of any in/outflow across all accounts for total performance and then separate XIRR tables with in/out flow for each asset class? That seems straight forward enough and really not hard to implement, just plug in date and amount.

Really appreciate the help as someone slowly working on getting a financial plan established as we will be done with residency this summer.

[FrancisBayes]

Thanks for your thoughts, especially on the private real estate. I’ll make changes to the draft of my column and double-check with the OG White Coat Investor before it’s published.

[bovie]

Sure, you can track individual assets, but for what purpose? It depends on the question that you're hoping to answer with XIRR.

In most years, stocks increase in value, so lump-sum will outperform DCA. For one year, let's assume that SCV and S&P500 have identical annual returns. If I buy SCV lump-sum in January and S&P500 bimonthly over 12 months, SCV might seem to have outperformed with XIRR for one year. But SCV IRL did not. If you tilt towards SCV thinking it would outperform large-cap stocks, then XIRR is going to mislead you unless the parameters are the same.

IMO, XIRR's most useful for ensuring that your portfolio's annualized return doesn't lag behind your expected annual return in your financial plan assumptions. It doesn't matter how your individual assets perform as long as your portfolio returns fine. If it doesn't then you have to reevaluate your asset allocation, asset selection, and investing strategy. For the asset allocation and selection, you would not use XIRR to reevaluate. For investing strategy, you would (e.g., do I tend to let cash sit idle for too long?).

Clearly you've never invested in a private real estate fund, or syndication, or had any rentals, or invested in literally anything other than a huge passive index fund. One day, if you do, the "purpose" or tracking returns for individual assets will become crystal clear.

Also, it's just not that hard. As explained, you can do this at the asset level and then calculate your total portfolio return--which takes literally the exact same amount of time if you know how to use a spreadsheet--but you can't go the other way. Think on that for a bit. We have computers to make things like this easy. You're pretending that we don't, or that it's not.

I'm not sure where you're getting this comparison between S&P and SCV. You're out in left field on that, that's not what I'm talking about. But you don't use XIRR, or any other actively updated metric, to re-evaluate a tilt. That's not an annual decision.

I think it's very illuminating that you say the only thing that matters is the return of your total portfolio, and then in the same breath say "it doesn't matter how your individual assets perform." Pray tell, where does this portfolio return come from if not individual assets?

I've served my purpose here to correct your information for OP and have no interest in going back and forth further with you about how XIRR works or how it is used.

Suffice it to say that considering some of the things you've said, if you read up on it a little bit further I think you'll eventually get a stronger handle on it beyond the simple "it tells me how my whole portfolio does," and that if you were to ask a room full of seasoned investors whether they want to know with accuracy how their individual assets and holdings have performed for them with their money invested, or just the portfolio overall, you'd find yourself as the only one with your hand raised for the latter.

[FrancisBayes]

Sure, you can track individual assets, but for what purpose? It depends on the question that you're hoping to answer with XIRR.

In most years, stocks increase in value, so lump-sum will outperform DCA. For one year, let's assume that SCV and S&P500 have identical annual returns. If I buy SCV lump-sum in January and S&P500 bimonthly over 12 months, SCV might seem to have outperformed with XIRR for one year. But SCV IRL did not. If you tilt towards SCV thinking it would outperform large-cap stocks, then XIRR is going to mislead you unless the parameters are the same.

IMO, XIRR's most useful for ensuring that your portfolio's annualized return doesn't lag behind your expected annual return in your financial plan assumptions. It doesn't matter how your individual assets perform as long as your portfolio returns fine. If it doesn't then you have to reevaluate your asset allocation, asset selection, and investing strategy. For the asset allocation and selection, you would not use XIRR to reevaluate. For investing strategy, you would (e.g., do I tend to let cash sit idle for too long?).

[bovie]

I think it depends on whether one is a "buy-and-hold" investor or actively managing their assets (eg, stock-picking).

If I'm buying-and-holding, I can't compare the performance of S&P 500 index fund that I buy bimonthly in my 401(k) with that of small-cap value ETF that I bought lum-sum in my Roth IRA in January. Even the timing of rebalancing is arbitrary for comparison of my asset's performance. It's not the asset's fault if I rebalance before it bottoms or never rebalance. You have to use CAGR to compare asset performance over a period of time.

In contrast, you might want to track the performance of your "fun-money" brokerage account or 529 account. In that case, you can track cashflows and compare performance of each account (but ignore dividends as cashflows). Or even stock A vs stock B (but count dividends if not reinvested).

Going to have to disagree here. It does not depend on whether one is a buy-and-hold investor or a stock picker.

Both of these people are clearly interested in the returns of their individual assets, as well as their portfolio overall.

Are you saying that buy-and-hold investors should not calculate the returns on their investments? That's what it sounds like, which of course is ridiculous.

I'm not sure what you mean when you say you "can't compare the performance of S&P 500 index fund that I buy bimonthly in my 401(k) with that of small-cap value ETF that I bought lum-sum in my Roth IRA in January." Sure you can; comparison (and general tracking) is the whole point of XIRR. And CAGR.

Now, it is more appropriate to compare those returns individually to their respective benchmarks. And what anyone does with all of this information in general is, of course, up to them. But any comparison can be made.

That said, most people will be adding to positions over time anyway so as to maintain their desired allocations, so that "lump-sum" of yours is going to have to get XIRR applied to it eventually if you want an accurate return. And even if you don't add to the position, XIRR will exactly equal CAGR if there are no subsequent cash flows. That's literally what it calculates.

But the point here is that you can calculate XIRR for individual assets, and then additionally from those same inputs you can calculate XIRR for the portfolio as a whole. But you can't do it the other way.

You can't get granular data (i.e., asset-level) from coarse data (i.e., portfolio-level). But you can get coarse data from granular data. So why wouldn't you?

Regarding "having to use CAGR to compare asset performance over a period of time," this is not true. This is exactly what XIRR does. XIRR is just a weighted average of individual CAGRs. Nothing more. They are directly comparable in terms of returns.

One is for the annualized return on a single investment made with a lump sum and with no subsequent cash flows, and the other is for the annualized return on a series of cashflows. They are both smoothed annualized rates of return, and can be directly compared assuming that they were utilized appropriately, and will exactly equal each other if both used for a one-time lump sum investment.

[FrancisBayes]

I’d argue that XIRR is indeed more for asset classes than account types—or more specifically, for individual holdings.

I think it depends on whether one is a "buy-and-hold" investor or actively managing their assets (eg, stock-picking).

If I'm buying-and-holding, I can't compare the performance of S&P 500 index fund that I buy bimonthly in my 401(k) with that of small-cap value ETF that I bought lum-sum in my Roth IRA in January. Even the timing of rebalancing is arbitrary for comparison of my asset's performance. It's not the asset's fault if I rebalance before it bottoms or never rebalance. You have to use CAGR to compare asset performance over a period of time.

In contrast, you might want to track the performance of your "fun-money" brokerage account or 529 account. In that case, you can track cashflows and compare performance of each account (but ignore dividends as cashflows). Or even stock A vs stock B (but count dividends if not reinvested).

[bovie]

I think bovie explains my thought process better than I could’ve. “Ignore” dividends not in terms of performance but as entries for XIRR…IF automatically reinvested.

But even if not reinvested and not withdrawn, I’d think dividends should be ignored because XIRR should be used for portfolios and account types, not asset classes. Unless you subtract cash in your brokerage account when you determine your portfolio’s value, the performance of cash sitting in your account is still part of XIRR/MWR.

Perhaps a little more clarification is warranted here.

I’d argue that XIRR is indeed more for asset classes than account types—or more specifically, for individual holdings.

I don’t really care what the return of my brokerage account was for the year. Or my Roth IRA. I do care what each of my funds returned for me—regardless of where they are held—which will not be the same as the time-weighted returns published by the brokerages.

And, of course, I care about the return of the portfolio as a whole. This is done easily enough by having an XIRR calculated for each holding, as well as an XIRR calculated for the column with the daily cash flow sums, of all holdings in all accounts—and if for some reason you want to know the returns at the account level as well, this is easily calculated with just another column of cash flow sums.

Regarding the dividend that is paid, not reinvested, and not withdrawn—this does still need to be treated as an outflow. Because that is exactly what it is. It will affect the XIRR calculated for that specific asset which paid the dividend—over long periods of time, the effect will be enormous.

However, the proper way to then deal with this is to consequently create an inflow for your money market fund on the same date as that on which the dividend was paid.

This way you will have a net zero flow for the portfolio as a whole (no money into or out of overall, just shuffled around from within), but the return calculated for your dividend-paying asset will be correct—and on top of that you will be able to correctly calculate the return on your cash in the form of your money market account return.

This is the most accurate and granular way to utilize XIRR.

[FrancisBayes]

- Ignore dividends unless you withdraw them
By this are you simply saying to ignore the cashflow of the dividends?
since 1945, reinvested dividends have contributed 33% of the total return in the S&P 500. Essentially, dividends can improve your performance by a third without doing anything. “
Reinvesting to rebalance is different than automatic reinvesting. Cumulatively dividends are significant.
Thoughts? Why ignore?

I think bovie explains my thought process better than I could’ve. “Ignore” dividends not in terms of performance but as entries for XIRR…IF automatically reinvested.

But even if not reinvested and not withdrawn, I’d think dividends should be ignored because XIRR should be used for portfolios and account types, not asset classes. Unless you subtract cash in your brokerage account when you determine your portfolio’s value, the performance of cash sitting in your account is still part of XIRR/MWR.

[Eluna]

To slightly correct what FrancisBayes wrote, a dividend can be ignored if it is not automatically reinvested. Whether it’s actually withdrawn is irrelevant.

If it is not automatically reinvested, it is treated as a cash outflow from the security paying the dividend (which is what it actually is).

Then it is consequently treated as a cash inflow to whichever other security you choose to reinvest the dividend proceeds in—or even as a separate inflow to the same security that originally paid the dividend, if it happens to be reinvested on a date other than that on which the dividend was paid.

And if the dividend is never reinvested, then it simply remains an outflow with no corresponding inflow.

Again, it is the timing of the cashflows that is the key here. The XIRR function simply solves for the rate of return given a starting value and date, an ending value and date, and non-periodic cashflows between them with corresponding dates. That’s it.

So if you take money out on Monday (dividend paid) and then automatically put the same amount of money back in on that same Monday (dividend automatically reinvested), the result is the same as not recording either transaction (zero sum).

See?

Thanks for the fantastic explanation!

[bovie]

Thanks for the link! I will definitely need to play around with that function. Not entirely sure why dividends aren’t considered contributions, but I won’t claim to have even the slightest idea how that function works so guess it just factors them in when?

To slightly correct what FrancisBayes wrote, a dividend can be ignored if it is not automatically reinvested. Whether it’s actually withdrawn is irrelevant.

If it is not automatically reinvested, it is treated as a cash outflow from the security paying the dividend (which is what it actually is).

Then it is consequently treated as a cash inflow to whichever other security you choose to reinvest the dividend proceeds in—or even as a separate inflow to the same security that originally paid the dividend, if it happens to be reinvested on a date other than that on which the dividend was paid.

And if the dividend is never reinvested, then it simply remains an outflow with no corresponding inflow.

Again, it is the timing of the cashflows that is the key here. The XIRR function simply solves for the rate of return given a starting value and date, an ending value and date, and non-periodic cashflows between them with corresponding dates. That’s it.

So if you take money out on Monday (dividend paid) and then automatically put the same amount of money back in on that same Monday (dividend automatically reinvested), the result is the same as not recording either transaction (zero sum).

See?

[Eluna]

I submitted a column (since approved) about how to calculate annualized real returns, so I will post it in this thread later when it's published. But until then...

1. Calculate money-weighted return (MWR) using the XIRR function: https://www.whitecoatinvestor.com/ho...xirr-function/
- Cashflows = deposits and withdrawals into your accounts
- Ignore dividends unless you withdraw them
- Calculate MWR for accounts and portfolios (eg, retirement, college), not each asset class

2. Calculate after-inflation (real) return
= (1 + MWR ) / (1 + inflation rate) - 1

Thanks for the link! I will definitely need to play around with that function. Not entirely sure why dividends aren’t considered contributions, but I won’t claim to have even the slightest idea how that function works so guess it just factors them in when?

[Eluna]

You are missing something: cashflows.

Use XIRR.

So I guess I am considering cashflow in that I am adding in my contributions, but I am not doing anything with the date added which it looks like XIRR factors in. Certainly seems like it would give me more accurate data vs what I’m doing so will need to play around with that function some.

[Tim]

I submitted a column (since approved) about how to calculate annualized real returns, so I will post it in this thread later when it's published. But until then...

1. Calculate money-weighted return (MWR) using the XIRR function: https://www.whitecoatinvestor.com/ho...xirr-function/
- Cashflows = deposits and withdrawals into your accounts
- Ignore dividends unless you withdraw them
- Calculate MWR for accounts and portfolios (eg, retirement, college), not each asset class

2. Calculate after-inflation (real) return
= (1 + MWR ) / (1 + inflation rate) - 1

- Ignore dividends unless you withdraw them
By this are you simply saying to ignore the cashflow of the dividends?
since 1945, reinvested dividends have contributed 33% of the total return in the S&P 500. Essentially, dividends can improve your performance by a third without doing anything. “
Reinvesting to rebalance is different than automatic reinvesting. Cumulatively dividends are significant.
Thoughts? Why ignore?