I 'm re-posting this from the Stock Advisor - Options board. In the SA options board, there was some discussion on measuring performance relative to an index (S&P 500), with the argument being that one should want to at least out perform this index in the long run, otherwise they are better off simply investing in a low cost index fund. There was also some discussion on using Google’s Internal Rate of Return function to measure the IRR when one has cash flow in and out of the account.
XIRR is much fun when looked over short time periods. That’s because we are calculating a compound annual rate over a short time period. So, good performance over a short time period will get magnified and vice versa.
I was looking at what my port had done since 12/31/2014.
Let’s say my port closed with a NAV of $1000 on 12/31/2014. I made the following cash additions since then, all measured relative to the $1000 closing balance on 12/31/2014:
o 1/6/2015 - $10.90
o 1/15/2015 - $10.20
o 1/29/2015 - $9.40
o 2/11/2015 - $9.40
As I write this, the portfolio is valued at $1106. Running these cash flows through the XIRR calculator I get an IRR of 70% since the beginning of the year!
Comparing this to VFINX, i.e., assuming the portfolio’s cash at 12/31/2014 was invested in VFINX units and cash additions also resulted in purchase of VFINX units, the NAV would have been $1048, for an IRR of 6.9%. Serious outperformance!
Now, I only wish for an extended run of this form, but since I have typed this up the market’s probably going to tank!