Compounded Annual Return Calculation
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Compounded Annual Return Calculation Hello... does bivio calculate a COMPOUNDED annual rate of return for the entire portfolio including stocks that have been sold? The understanding is that 14.9 % is the ideal return to double our money over five years. Thanks. Rhonda Dunn wrote: > Hello... does bivio calculate a COMPOUNDED annual rate of > return for the entire portfolio including stocks that have > been sold? The understanding is that 14.9 % is the ideal > return to double our money over five years. Thanks. Check out "The Rule of 70" Take, 70 divide it by your estimated CAGR and the output is how many years it would take to double your money... In your case, 5 years would equal 14% CAGR... 70/14 =5 years First, most people use the rule of 72, not 70 as it's both more accurate and easier to use. Second, that doesn't answer the OP's question. The question wasn't how many years it would take to double, or what CAGR would be required to double in a set time period, but simply whether bivio calculated the CAGR.
The answer is yes. The Performance Benchmark report calculates the CAGR for the entire portfolio between any two dates. The Investment Performance report also calculates CAGR, but doesn't include cash in the calculation. Cash acts as a drag on CAGR in a rising market, and improves CAGR in a falling market. Note that bivio calls the CAGR AIRR (annualized internal rate of return).
Ira Smilovitz Join me at InvestEd 2011 In a message dated 02/07/11 18:27:39 Eastern Standard Time, westtimothyj@bivio.com writes:
Dear Rhonda, You are correct. If you invested all your money on a single day in an investment that grew at 14.9% per year compounded annually, at the end of 5 years you would have doubled your money. There are two parts to determining how much you would have earned. The rate at which it is growing (14.9% compounded annually) and the time it has to grow (5 years). In a club, you don't usually put all your money in at one time and then return 5 years later to collect what you have earned. You have cash going into your club at different times. IRR is the rate of return that your investments are growing at. But they only grow for the length of time that they are invested. If I put in some money at the beginning of year 2 of a 5 year period, even if it grows at 14.9% a year, it will only have 4 years to grow so it will not double. If you add the amounts each of your cash inflows grow to at the IRR rate for the amount of time they are invested, you will end up with the final value of your club at the end of the time period you are studying. I like to think of IRR as a magic CD rate. If I am looking at a 5 year time period, it is as if, each time I had money to invest during those 5 years, I could put it into a CD that paid the IRR rate of interest. Since I put money in at different times, I ended up with different amounts when I cashed in each CD. But, if my investing decisions meant every time I invested money during a 5 year period, it was growing at 14.9% compounded annually, I'd be pretty happy. -- Laurie Frederiksen Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio |
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