As an extreme example, let's assume that you started with $1,000 on 12/31/01, but you added $1,000 on 1/1/02 and ended up with $2,200 on 12/31/02. Using only two valuation dates, your return would appear to be 20%, because the formula essentially computes a $200 return as a percentage of the $1,000 invested. However, in reality, you had $2,000 invested for pretty much the entire year, so your return should be about 10%, or a $200 return on a $2,000 investment.Okay, how obvious was that?!? DOH!If it is difficult to value the portfolio at each contribution and withdrawal, then try to value it at the end of each month at least. Your numbers will be much more accurate. Okay, but unless the periods between contributions were equal, wouldn't this skew the results? With my 401(k), not a problem because contributions are input twice a month. However, if this were a taxable account and my contributions were irregular, such as one in January (15 days in) then the next not until say March 20th, how do you take into account the differences in how long the balance was at a certain level? I don't see any adjustment to the returns based on # of days in the formulas. Or, is this just too anal? :)I REALLY appreciate you taking the time to explain this stuff. I'm trynig to get more granular in my analysis of our funds.3MM
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