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Relative Return-How 1.5% Can Become 14.5%

If you start paying more attention to benchmarking your portfolio and keeping track of your relative return, you will probably see that the longer the time period you evaluate, the harder it is to beat your benchmark.  If you do beat it, it may be by “only”  1 or 2 percent.  Let’s put that word “only” in perspective.

Here’s an example,

Suppose you had started your investing 10 years ago with $100,000.  You had the choice of two different investments,  one where you achieved a 10% IRR  and the other where you achieved “only” a little bit better return of 11.5% IRR.

At the end of 10 years,  this is what you would have had in your accounts:

Investment 1-(10%    IRR) - $259374.25

Investment 2-(11.5% IRR) - $296994.68

An increase of $37620.43 or 14.5% more money.

This is because IRR is an annualized return.  Due to the magic of compounding, you earn money not only on your principle but also on the income you’ve earned in previous years.

So, when you look at your club returns related to your benchmark returns, please pat yourselves on the back for almost any increase over the benchmark that you see.  Your efforts are paying off more than it might seem.

Laurie Frederiksen

www.bivio.com