Stock Bull,
>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.
Unless you mean something other than what you wrote, this is not correct and a simple check with Quicken will show you that.
Actually, it is NOT quite simple check, since you cannot add monies to investment accounts that are linked to cash accounts, since the money goes to cash account then and, yes, the cash account is not used in IRR. Maybe that's what you mean. However, if you force Quicken to keep money in investment account by purchasing fake "cash equivalent" security, the IRR does change if you add or remove this cash equivalent. Try this: Have account with anything in it. Calculate IRR for a year. Now add significant amount (let's say $10000) of cash equivalent fake security (let's call it CASHE, so it does not have a valid ticker, and give it a price of $1, so you get 10000 shares of CASHE). And remove it from the account some time later at the same price as you added it. You will see that IRR has changed.
>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.
I said "no interest" to simplify examples. Even if you earn minuscule interest, it does not matter. Actually, it is more complicated than that. If you set up your investment account in Quicken linked to a cash account, the interest in cash account would not be counted towards IRR, while it possibly should.
>The IRR, gets around this problem as it doesn't take into account the addition or subtraction of assets from the account.
Actually it does. Just the example above. :)
>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.
Agreed, so I am not sure where we go from here. Maybe we can agree that Quicken IRR gets the least distortion if you take long term periods to calculate it and you do not have a large cash inflows/outflows that earn returns different (much larger or smaller) than the rest of the account. Whoof, what a mouthful. :) Quicken IRR works somewhat, but it does not necessarily show you what you think it shows.
Best regards |
