I think I know most of the answers here, but I nevertheless want to be 100% sure. (The reason is because this new 401k thing I have seems to be a bit confusing in terms of terminology and the definitions in the notes.)
Okay…there are three terms being used I want to make sure of, from the point of view of the administrator being consistent with normal definitions. On one measure, I am reading a “one-year performance” of my investments…that seems straightforward. Then when I switch to the last four years (when I came over to this 401k/job) it reads “Personal rate of return” and then next to it, “Annualized.”
In terms of “Annualized,” I assume I can consider that the CAGR over the last four years for me, and then simply compare it to whatever index’s CAGR I want to (e.g., VFIAX)?
But the personal rate of return…is that synonymous with Internal Rate of Return? I was surprised at the complexity of the definition I read on the 401 k site. It illustrated complex formulae, as well as saying that it is an iterative process. It really sounds to me like IRR, and to be honest, that always confused me as well. It almost seems like it’s saying it’s impossible to know one’s exact return if one is adding in weekly… but that can’t be, because we all have performance figures on our brokerages, etc.
Sometimes though I wonder if the best the calculus can do is simply offer a close estimate of return. I’ve always thought when using something like backtesting sites and finding out total returns based on dividends and price increases and additional investments that what really was being outputted was only an estimate and not a true number. Maybe it’s the same with this concept.
Anyway, thanks in advance if anyone knows about this or can link a site that goes through it step by step…