How cash affects IRR in down market?
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How cash affects IRR in down market? While preparing my club's annual report, I include the IRR comparison between my club and the Vanguard 500 Index as computed using the "Performance Bench Mark" tool. I also include the stock minus cash IRR calculation created by "Investment Performance. In the last several "up" market years, the stock minus cash IRR has been higher than the Performance Bench Mark. Totally understandable as the cash gained no value so it acted as a drag on the club's overall IRR. However this year, both the club's and Vanguard's IRR are negative. Therefore, I would have expected the stock minus cash IRR to be a bigger negative than the club bench mark as the cash should have be a moderating influence. The reported results: Performance Bench Mark: Club -1.8; Vanguard -5.5 Investment Performance: Club -1.4 Can someone explain why the calculation containing the cash has a larger negative IRR than the calculation of stocks only. Jack Ranby I would expect the cash impact to be what you see: less of a negative. IOW, the cash with zero change is a moderator. That's what our club also experienced. We're down less than the Vanguard index is down for 2018. But I'm often wrong, so I look forward to someone more knowledgeable to speak up. I don't think the results are that straightforward. While the cash is a moderating factor, you need to also consider the length of time it's moderating a rise vs. a decline. There will also be an impact due to the relative amounts of cash and stock. In a rising market, a fixed amount of cash will have less impact as time goes on, more impact in a falling market. Ira Smilovitz I would expect the cash impact to be what you see: less of a Also remember, it is not the Vanguard Index, its a Vanguard fund tracking the index. The fund does have some cash of its own as it manages people buying and selling shares of the index fund. While i don't believe this is a significant factor, it supports Ira's answer that this is not that straightforward. Lots of moving parts. Mark Eckman
Mark Eckman |
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