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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (96906)	7/24/2002 4:21:20 AM
From: Simba	Read Replies (1) \| Respond to of 132070

twfowler: You make a good point. The fact of the matter is there are two ways to quickly approximate an equivalent rate of return for a constant investment stream. To do it exactly requires the use of the people internal rate of return calculation in a tool such as Excel. For example consider a 5 year period. If you contribute $1000 per year and at the beginning of each year. Your total investment is 5000. Suppose the investment grew to 7000 at the end of the 5 year period. You can view it two ways to get an approximate annual return. 1. you can use the average principal for the entire period and assume that you invested it at the start of the 5 year period. In this case 5000*0.5 = 2500 $ yielded 2000$ over a five year period and compute a compound annual return. In this case it will come to about 12.5% 2. you can also imagine that you had the total investment working for only half the time period, thus $5000 returned $2000 in a 2.5 year period. In this case you approximate a return of about 14.4 % A true internal rate of return calculation estimates it to be 11%. But the chart in home.att.net only plots the "gross" return comparison between two investment schems: SP500 and a 6% constant yield instrument. It does that right. The gross return is smaller with SP500 including dividends than with the 6% instrument with lower risk for the entire past decade. The same will be true for the imaginary internal rate of return. For example the chart shows a gross return of about 42% including a 2% constant dividen if you started DCA in Jan 91 into Sp500. It is below the 6% line which has a constant internal rate of return of 6%. As to my post it was not clear what "compound annual return" BGR was achieving with his passive DCA strategy starting in June 1993. He said 13%. From the chart if you started in June 1993 you have a gross return including dividends of about 18% compared to about 32% with the 6% constant yield DCA. Therefore the IRR should be much less than 6%. He claims 13% and on top of it he said that he has been moving his SP500 money into NASDAQ for the past two and half years. Simba