Recommendations: 0
2old4bs: "At the end of each calendar year, I calculate what my 'cost' was, that is to say, the net of all additions and withdrawals during the year, plus the 'cost' balance from last year. On a spreadsheet I then plot the cost at the end of each year, and the value at the end of each year. By comparing the two I get an 'overall' or 'cumulative' rate of return."
total cumulativee rate of return since inception, ok.
"So, if in year 1 I had invested (net) $1000 and at the end of that year had $1500 in value, that would indicate a 50% rate of return."
I would depend on when during the year you invested. If you invested the entire net $1000 on 1/2/xx and ending the year 12/31/xx with $1500, I would agree.
OTOH,if you invested over the course of the year, your actual annual return would be higher.
The easiest example would be to assume that you lump sum invest the entire $1000 on 7/1/xx and ended the year with $1500, you annual rate of return would be 100% becuase you made $500 on $1000 in six months.
"If I did the same in year 2, ending with a cost of $2000 and a balance of $2300, my 'cume' rate of return is 15%. To calculate what the actual rate of return was for year 2 I take the $300 gain, deduct the $500 gain from year 1, and wind up with a loss of $200. So, according to my figures, my Year 2 return is a 10% loss. Is this a crazy way to do thisit seemed fairly straightforward to me ????"
Again, it depends when you invest, and losses work in reverse, if you were not fully invested for the entire year, then you annual rate would acutally be higher in a loss situation.
To stay simple, stay with the one year example we used above, but switch losses to gains.
If you invested the entire net $1000 on 1/2/xx and ending the year 12/31/xx with $500, I would agree that annual loss is 50%.
Assume that you lump sum invest the entire $1000 on 7/1/xx and ended the year with $500, you annual rate of loss would be 100% becuase you lost $500 on $1000 in six months.
IOW, annual rate of return (or loss) is intended to report what would have happened hypothetically if one had been fully invested the entire year and the actual results of the moer limited time period were repeated throughout the year.
For example, someone who invests $1000 on 1/2 and has only $600 left on 12/31 had a better year than someone who invested $1000 on 12/20 and had only $600 left on 12/31.
Just my $0.02. Regards, JAFO



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