Why is new members' money worth more than old members' money?
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Why is new members' money worth more than old members' money? Jamie wrote....
My club has added several new members lately, and after
inputting their contributions, I noticed that their payments were suddenly worth
more than they had paid--for example, a $520 deposit was worth $550. However,
the old members' valuations, for the most part, are well below what they paid
in. Why isn't every member valued at the same percentage of their
contribution if everyone is sharing the same portfolio?
Member payments (contributions) purchase units in the club based
upon the current unit value when the payments are made.
Therefore, payments made at different times will perform
differently. In other words, in your situation the
old members' purchased a greater number of units in the club when the unit value
was high and the new members' purchased a greater number of units in the club
when the unit value was low.
The same effect can be seen in the following example. Let's
assume you invested $1000 in MSFT stock a year ago at $75 per share. A
friend invested an equal $1000 into MSFT 6 months ago when the price was just
above $40. Today, you've both invested $1000 into MSFT and the current
price is $65. Your money has been invested longer but your
investment is worth less. Your friends equal amount of money hasn't been
invested as long but the stock is now worth more than the original
investment.
In either case, your club or the MSFT example, had the value of the unit or
stock gone up rather than down when the later investments were made, the
earlier investments would have been worth more than the later
investments.
Thanks for using bivio!
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