Hi Jurgis,
Happy to read that you got your Quicken computer back. There are a few points with the IRR formula that are very important to understand.
The IRR is time dependent. So, the value of the IRR will change if one were to change the time period used in the calculation. This assumes that the data used in the calculation is keep constant. So, short time periods will give a larger value of IRR than longer time periods. And, this assume that the data is kept constant.
One can add, or remove monies for an account and not affect the value of the IRR, again assuming that the data is constant and the only variable is time.
The value of the calculated IRR is dependent on the rate of return. If you have an broker account that holds a number of stocks, bonds and cash, then the IRR is calculated on the combined returned of all the assets held in the account.
In your examples you infer that you have cash in an account and the cash earns no interest. In this case, the cash would not contribute to the account's overall return, so it won't affect the IRR for the account. However, why would anyone put cash in an account and not earn some interest? All accounts that I'm familiar with have Money Markets to hold the cash, and the Money Markets do pay interest on the cash held.
In the case, wherein, a person uses a simple percentage formula to calculate their return, and the account is used to add and remove assets (bonds, stocks, cash, etc.) the percentage returns will be greatly distorted. The IRR, gets around this problem as it doesn't take into account the addition or subtraction of assets from the account.
I hope I've made some sense. It hard to discuss this type of problem without having a black board, or while board :), to show the examples that I'm trying to explain.
Happy New Year to you...
Stock Bull |
