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Don...Thanks for the great info about the mechanical investing methods....that is way more info than I expected to get from that post.

I have a few more questions to ask:

#1) CAGR was mentioned...what is that? I've found reference to all the other acronoms... I just can't find that one.

#2) I've got an account at a discount brokerage...it will cost $48 in person or $38 online. Is this a good price? I've also got a full service broker at my bank who will amke purchases and give advice for $85 per shot. Is this a good idea for a beginner?


Thanks for the responses (in advance),
Tim
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Well I can answer question 1 for sure.
CAGR is Compounded Annual Growth Rate.

It's a measure of return using compounding.

As for number 2 I have an account at Bank of Montreal
Investorline.
I pay 25$ commission per trade of 1000 shares or less.

The average cost (I only recently opened my account)
after researching most of the major banks/Discount
brokers in canada was $29 for trades.

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The directions web site (www.ndir.com)has a comparison of the discount brokers. $25 to $29 dollars seems to be the standard price for an online trade.
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Smooch:

CAGR for me means Compound Annual Growth Rate. Sometimes people will write it as CAAG (Compound Average Annual Growth). If you search around in the Archives for the Fool, you'll eventually stumble on to some great explanations of why portfolio return is preferably expressed in compound growth terms. In short, it's to compare apples to apples: how much an investment grows per year, over time. Compound growth, as compared to what is called "average annual return" or "average return", is the best measurement of how much your wealth is growing (or not!).

For example, take a two-year portfolio, with returns in year 1 of +25% and in the second year of +5%. The "average annual return" is simply (25+5)/2 = 15%; which is the "arithmetic average" (or mean). (The AAR is actually useful, though; in any given year, it is what you can expect the portfolio to return, subject to the "standard deviation" (ie, the range of swing, up and down, that the portfolio will have).)

But using AAR won't give you the correct return: in the example, starting with $100 will give you 100 X 1.15 = $115 in year 1 (end) and then 115 x 1.15 = $132.25. But in fact you only have 100 x 1.25 = $125 by year 1 and then 125 x 1.05 = $131.25 in year 2: a difference of $1. The CAGR is given by a math formula; if you have a spreadsheet, look in the help under things like "present value" or "future value" or "rate". (I'm getting lazy, and don't want to go into the full explanation. It's readily available elsewhere at the Fool.) I use a Texas Instruments BA II calculator to calculate it easily. Here, the CAGR is 14.56%. You'll note it's a little lower than the AAR. We can check it: 100 x. 1.1456 = $114.56 x 1.1456 = $131.24 (you lose a penny to rounding).

When you're looking at someone's report of a "return" from an investment, look carefully to see whether the return is being reported as the AAR or the CAGR. Mutual fund companies like to use AAR sometimes, because it inflates the return; it is always a little higher than the CAGR. But because it is comparable, it is the CAGR that investors are interested in.

2. I think you can find a better deal elsewhere. Norm Rothery's site http://www.ndir.com has a web survey. I use Investorline (Bank of Montreal). It costs $25 for a market order; and $29 for a limit order; both on the web or by automatic telephone; it's $35 to talk to someone. I think TD Waterhouse has a flat $29 fee for web trades; my brother says he's pleased with them. Bank of Nova Scotia I think offers a $22 fee, but their software is cumbersome. But sometimes the extra price can be justified, if the broker offers some extras, such as research. Investorline doesn't offer too much, but it's worked ok for me. However, I don't trade a lot. Different people report different experiences.

Don
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Don:

My tracking software reports anuallized gains in what it calls annualized IRR. How does this relate to the CAGR?
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I use Greenline(TD Waterhouse) - no problems todate.

HOWEVER - I read in ...... (it will come to me, I think it was the wealthly boomer?) that you could trade off TD Waterhouse web site in the states for $9US a trade. I haven't worked out the logestics of this yet, but will get back to the board on the weekend.

O2
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IRR stands for "internal rate of return". I think it measures the same thing as CAGR, but it takes into account any cash inflows to or outflows from the portfolio that happened during the period being measured. In Excel or Quattro Pro, look for a function called "XIRR". There's a column by Robert Sheard in the Fool archives, from 1998, where he shows how to set up a spreadsheet to use the function. You set up two columns, the left hand one for the dates: at a minimum a balance forward date and then the period end date. In between will be all the additions or subtractions you made in the account; for example, in a retirement account, new money (or securities) going into the account, but not, say, income or dividends that arise from investments already in the account. (At least, that's what I do; I might be wrong about not inputting the interest or dividends received, but I find that to be a pain.)

The right hand column lists the money amounts: balance forward, balance at end, and all the incoming or outgoing amounts. The end balance has to be a negative number. Put the function (@XIRR in Quattro Pro) in the right hand column underneath the last number, and give it the two ranges as parameters.

You might have heard of the Beardstown Ladies, an investment club who got caught on this one. They measured return including all the money they added. So, they started with $100, added $10 during the year, and end the year with investments totalling $120, so they reported a gain of 20%. No. My spreadsheet gives an IRR of 9.53% (on a one-year time frame, with the addition coming on July 1).

Don
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CAGR is the Compound Average Growth Rate, i.e. the rate at which a lump sum invested with no additions would have grown each year. Ann Coleman wrote a good Foolish Four column which gives an overview:

http://www.fool.com/ddow/1999/ddow990309.htm

The easiest way to calculate CAGR is to convert each years percent return into a decimal (eg. 25.2% becomes 1.252 and -12.3% becomes 0.877, that is 1-0.123) and then to use the GEOMEAN function of Excel to calculate CAGR (you will have to subtract 1 from the result to get back to a percentage).

IRR or Internal Rate of Return represents the same concept but takes into account cash flows into and out of the account. This is calculated with the XIRR function of Excel. To calculate XIRR, set up two columns in your spreadsheet, the date of each cash deposit or withdrawal and the amount. The final row represents today's date and the current balance in the account expressed as a negative number, i.e.as if you were withdrawing all the money in the account. Do not include dividends in your listing as they are part of the growth in the account, not new money added.

For example, say your started and account with $1,000 and added 3 further installments of $1,000. Today your account is worth $5,436.77. What is your average annual rate of return?

Date Deposit(Withdrawal)
January 1, 1998 $ 1,000.00
June 30, 1998 $ 1,000.00
January 1, 1999 $ 1,000.00
November 6, 1999 $ 1,000.00
November 22, 1999 $-5,436.77

XIRR = 0.31589238

Therefore the annual return on this account is 31.59%.

Mo.
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I use Canada Trust's Easyweb (for web based trading).
$29/trade for trades involving 1,000 shares or less.
I have had no problems to date (U.S. & CDN. trades).

Once I entered an incorrect buy volume (I made a key punch error - I rushed, but will never do that again- which put my purchase $ over the available cash in the account. C.T. left a message on my voice mail (since I was on the phoneline with the computer) saying they could not process the order without further instructions. I checked the time & the message was left almost instantly after I placed the order = good service.

IKan
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Tim

I forgot to mention that Canada Trust also informed me of the trade input error by notification on their "Log Order" web page, as well as telephoning me immediately.

Good luck
IKan
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I use TD WATERHOUSE also - were you able to use their
U.S. service - big difference $29 to $9

Bob Sauve
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I use TD WATERHOUSE also - were you able to use their
U.S. service - big difference $29 to $9

Bob
I also use TD WATERHOUSE and when you buy a US stock
youll find as I did , that they charge you 29.00, BUT
in US $$$. No deal.
later Brian.

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