I did an interesting project the other day-- I went back through my E*Trade investment transactions to trace all the cash I put in and took out. This goes back to sometime in 2001 or even a bit earlier, I think, when I first deposited about $1,000 in order to start doing some investing outside of my 401k. Other than that, all my money had been in savings accounts and CDs up to that point.

When I totaled everything up, my net contributions to my E*Trade account were about $33,875. This was never done on a regular basis-- I'd sometimes put in a couple thousand dollars at a time, sometimes more. And there was a period in 2005 and 2006 where I cashed in some funds and took out money in order to pay the down-payment and closing costs on my condo.

As of the day I did this, the current value of my E*Trade account was $49,779. So my net investment gains were $15,904, or a total return of about 47%. It's interesting to compare this to how E*Trade shows my current portfolio gains as an increase of about $2,960 or 6.3%.

Obviously, two very different calculations are being done here. E*Trade considers every reinvested dividend as part of the cost basis the gain is calculated against, so as shares go up in price, those incremental purchases have gained less in relation to the current price. By either method, it's hard to really say how much my annual rate of return has been overall because I've bought and sold various funds at various times, and it's all a bit complicated, at least for someone like me whose math expertise hits a brick wall at a certain point!

Since I put money in and took it out over 10 years, I can't really compare my performance to an initial investment of $10,000 that was just put into a fund and left sitting there with all gains reinvested, which is the standard way funds are compared on E*Trade. But just to look at a few examples, the first of which seems to have the highest average annual return over the 10-year period of any mutual fund offered on E*Trade:

Symbol | $10k invested 10 years ago now worth | Avg. Annual 10 Year Return |

INIVX | $134,996 | 27.46% |

BGEIX | $89,987 | 22.91% |

EITEX | $51,714 | 16.79% |

DPCAX | $48,578 | 16.60% |

AAFPX | $9,097 | -0.99% |

INIVX and BGEIX are gold/precious metals funds (that I really wish I'd invested in!), EITEX is an emerging markets fund, DPCAX is a China fund, and AAFPX is an S&P 500 index fund.

Anyway, to me, the bottom line is that I have $15,904 that I didn't have before, and that's quite a lot better than just looking at my current E*Trade balance. I've invested in a variety of stocks and mutual funds without any cohesive strategy other than to have a blend of aggressive and conservative investments and not put all my eggs in one basket. Given that we've been going through an extraordinary economic crisis, with the S&P 500 about 20% below where it was 10 years ago, and the Dow about flat over that period, I think I've done ok.

## 12 comments:

Get a swag of your annual rate of return with the XIRR formula in Excel. List out your cash contributions as negative values, and anything you withdrew as a positive value (and the current value as a positive). Add a second column with the dates related to each of these values. Then use =XIRR and voila, a time-adjusted return!

Interesting, I've never used that formula! I tried it with these values, but is it correct to just have the last number in the series be the current value?

1/1/2001 -1100

8/1/2002 -600

9/1/2002 -329

12/1/2002 -675

12/1/2002 -2700

1/1/2003 -2000

2/1/2003 -500

10/1/2003 -3000

1/1/2004 -944

3/1/2004 -7200

7/1/2004 -2000

7/1/2004 -2200

7/1/2004 -2800

1/1/2005 450

11/1/2005 8033

2/1/2006 1099

4/1/2006 5054

4/1/2006 4096

4/1/2006 6352

10/1/2007 196

5/1/2008 -2715

3/1/2009 161

9/1/2009 -4000

9/1/2009 -553

10/1/2010 -26000

11/1/2010 49779

Return 11.84%

And I meant to also say THANKS! I'm going to be playing with that formula a lot!

I was going to mention the XIRR formula in Excel, but it seems like somebody beat me to it. I wrote a post a while back about calculating rate of return that actually references a post on Fat Pitch Financials where George discusses XIRR.

It is correct to say that the last number in the series is the current value of your account. The only other thing you might want to add to your spreadsheet is the effect of taxes. If you had to pay taxes (on capital gains distributions or dividends), you would enter that as a negative number.

This is a pretty slick post. Simple math is a great tool. As long as the balance is always higher than the total you contributed you are winning. Divide the balance by the contribution and subtract 1. You either get a positive or negative percentage. If the percentage is not what you are hoping for, then look around for different investment vehicles (i.e. different mutual funds).

Madame X example: Balance = $49,770, Contribution = $33,875. Balance divided by Contribution = 1.47. 1.47 - 1 = .47 which means a positive percentage growth of 47% since inception. Now if you divide that 47 by the total years the account has been open (lets assume 6 years) then its like having a 7.8% growth rate per year. If you the years was 10, then its only a 4.7% return and Madame X may want to look for better vehicles. The key is to keep contributing as Madame X is doing. Great BLOG!

A follow-up to the XIRR. While the statistics are great, the average person doesn't really care. I research the heck out of mutual funds to get the best rate of return, so I'm a bit of an enthusiast. Using complicated formulas doesn't focus on the root of your goal, which is saving money. That 10K average return value they use is very important. You can put any number you want in there, the point is when you research mutual funds you should look at funds that have been open for at least 10 years and have an average rate of return of greater than 8%. That's it. Don't worry about fees and loads (although no-loads can net you good returns.) Some years will be negative, but the following two years will be huge positives. Even with the economic downturn in 2008 and 2009, your new contributions at that time has netted you %15 gains 2010 year to date in the S&P 500. Just hold on.

Great way to analyze it. Way to go Madame X. I agree w/ David no need to worry about fees

In my mind, the E*Trade approach to including reinvested dividends in the cost basis is correct. You paid taxes on those dividends at your marginal tax rate and you could have taken the money out and spent it. And when you ultimately close your long positions, you won't be taxed on the dividends again, only capital gains on any growth since.

Great post. Interesting formula.

Reading through this article and seeing those gains is a prime example of how a great deal of society has the ability to put some money aside to invest in order to save for the future.

Armed with XIRR and Yahoo's historical quotes (finance.yahoo.com), you can then compare your portfolios performance against a few bench marks for those exact time period. From 1/1/2001 to 11/1/2010, the S&P500 (SPY) returned 1.1% and the Dow (DIA) returned 2.72%. Your portfolio has achieved the much sought after market beating performance. Congratz!

I have to agree with your concluding statement. I think that you have done much better than others in this tough economy. I recently started with some stock trading, in order to diversify my portfolio, can't wait to see the growth. This post is inspiring! Thanks for sharing.

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