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Saturday 21 January 2012

Starting a new year with new accounts

I’ve just started to really take my accounts seriously. Not that I do not keep track of where my money is flowing, but I find that it is not thorough in my accounts. I realised that my returns for my paper assets far exceed my expectations… I wanted to re-start all calculations as I've made several changes and modifications to my excel sheets. So here's the results of my performance since Jan 1, 2012. Cheers!

Savings
XIRR (Since 1 Jan 2012): 0.00%

Banks have not paid interest yet, especially not in the middle of the month. Don’t expect my savings to soar though, since banks give <1% interest p.a. So if you think putting money in the bank is the best way to keep your hard-earned money, think again!
Inflation rate in Singapore for 2010 is 2.8%, and expecting to hit 5% this year. (http://www.singstat.gov.sg/stats/keyind.html) So unless your money is making more than 5% returns last year, you’re losing money to inflation.

Portfolio
XIRR (since 1 Jan 2012): 901.87%

Some may ask why I use XIRR instead of CAGR. Here’s my CAGR: 3996.11%

Reason for the big difference? I’ve injected cash on 9 Jan… So I’ll stick to XIRR for more accurate tracking of my performance.



Investopedia explains ‘Compound Annual Growth Rate – CAGR’
CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an (initial) investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Don’t worry if this concept is still fuzzy to you – CAGR is one of those terms best defined by example. Suppose you invested $10,000 in a portfolio on Jan 1, 2005. Let’s say by Jan 1, 2006, your portfolio had grown to #13,000, then $14,000 by 2007, and finally ended up at $19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value ($19,500 / $10,000 = 1.95) raised to the power of 1/3 (since 1//# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).
1.2493 – 1 = 0.2493
Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.


However, it doesn’t work if you inject or withdraw cash, affecting the initial value

IRR/XIRR (internal rate of return) will be a better indicator as it takes into account capital withdrawals and injections.

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