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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (29515)	12/31/2007 12:51:05 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78702

What I am interested in is what the auditor calculated as their returns. IMHO, if initial investment was $1000 and $25 (2.5%) is added every month, which ends up being $300 yearly or 30% of initial investment, all kind of fluctuations will affect the rate of return more than the "actual" investments. At least for couple of years. At least possibly they did not allow withdrawals... I have looked at various rate of return numbers in Quicken, which I assume would be similar to what auditors use and it showed really crazy percentages. So I gave up... Maybe I should relook it again... Here are some things which complicate the rate of return calculations assuming inflows/outflows: - Start with $1000. Add $10000, earn 4% = $400, withdraw $10000. End with $1400. 40% return? Not really, IMO. - Start with $1000. Earn 20% return = $200. Add $1000 in December. End with $2200. 10% return? Not really, IMO. - Combine the two above and your head starts to spin. It seems that Quicken calculates the return using something like the following: -In = Sum initial amount and all inflows -Out = Sum remaining amount and all outflows - Divide Out/In. This somewhat takes care of the first issue, but does not take care of the second issue. It also does not take care of the following variant of the first issue: - Start with $1000. Earn 20% on it. Temporarily add $10000 for two days, earn nothing for 2 days, withdraw $10000. Quicken says: 1000+10000=11000. 1200+10000=11200. 11200/11000=1.018 = 1.8% rate of return. Is this fair/correct? Not really, IMO. You only invested $1000. But if that $10000 earned anything, you have to account for it too... All examples are exaggerated for clarity, but all of them occur in reality.