Personal Rate vs. Investment Rate of Return

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Topic Author
mew
Posts: 3
Joined: Sat Oct 23, 2021 12:47 pm

Personal Rate vs. Investment Rate of Return

Post by mew »

My 1 Year Personal Rate of Return is 15.23% and my Investment Rate of Return is 24.29% = 9.06% difference?

I understand that these rate of returns are calculated differently but I'm an index investor who doesn't time the market so can't understand the wide margin? It just seems the difference is HUGE and would just be surprised if my "luck" is that bad with my random investments to account for the difference?

Roth IRA - Fidelity FIPFX (Fidelity Freedom Index 2050 TDF)
Invest $300 Monthly / 25th of the month Automatically; Occasional additional investment upon receiving discretionary income / gifts (less than 1000/yr invested randomly (no timing).

Is something off? Or is my time-frame / reference too short to determine difference?
Doctor Rhythm
Posts: 3061
Joined: Mon Jan 22, 2018 2:55 am

Re: Personal Rate vs. Investment Rate of Return

Post by Doctor Rhythm »

How old is this account? I’m not sure how “personal rate of return” is being calculated, but it makes me think that this is a relatively new account, and that recent contributions make up a big fraction of the overall balance.

Also, are you sure you’re comparing the same time frames? For a 2050 TDF, the higher number looks like it could be a 1-year return. The lower number might be a year-to-date figure.
Last edited by Doctor Rhythm on Sat Oct 23, 2021 2:07 pm, edited 1 time in total.
Lionel Hutz
Posts: 379
Joined: Sat Jan 30, 2021 12:18 pm

Re: Personal Rate vs. Investment Rate of Return

Post by Lionel Hutz »

Personal rate of return is influenced by when you buy & sell. Buy being say regular contributions, and sell being an exchange of funds or distribution from the account.
Thesaints
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Joined: Tue Jun 20, 2017 12:25 am

Re: Personal Rate vs. Investment Rate of Return

Post by Thesaints »

Fund A goes up 1%/month and you invest $100 on January 1st and $100 on July 1st.
On December 31st the rate of return for fund A is 12.7%, yours is 9.4%.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Personal Rate vs. Investment Rate of Return

Post by dbr »

mew wrote: Sat Oct 23, 2021 1:02 pm My 1 Year Personal Rate of Return is 15.23% and my Investment Rate of Return is 24.29% = 9.06% difference?

I understand that these rate of returns are calculated differently . . .

But how they are calculated makes all the difference, but it is also matters why they are calculated differently. The math problem to be solved is what we should take return to mean when the return is not constant through the period and you don't have the same amount of money invested through the period. In this case the fund probably returned more early on when you had less invested and less later on when you had more invested. On average time in the market you didn't fully participate in the early market. The investment rate of return assumes a lump sum invested from the start.

You didn't do anything wrong or have bad luck; it is just two different reports for two different situations.

A couple of posts above point out the same arithmetic result.
Topic Author
mew
Posts: 3
Joined: Sat Oct 23, 2021 12:47 pm

Re: Personal Rate vs. Investment Rate of Return

Post by mew »

Thanks All! It seems like a large variance but upon further research I guess its possible. I believe the difference is found in the length of time the account has been opened and I didn't realize my contributions have varied more than I anticipated up until the last 6 months. So the varied amounts contributed at different times account for this difference between the Invest and Personal rates of return. :happy
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: Personal Rate vs. Investment Rate of Return

Post by dbr »

The problem is that return for a period has a definition that assumes a change in value of the investment is attributed to gains and losses on the money invested and not attributed to adding or removing money along the way. If I invest $1000 at the start and $1000 along the way and end up with $2500 that does not mean I had a gain on the money invested of $1500. My personal investment gain is $500. But return is a rate relative to the amount invested and that amount changed in the middle. Now I have to not just not count as gain the second $1000, I also don't know what basis to compare the gain to. Furthermore return is a rate relative to a period of time and the first $1000 would have been invested for the entire time and the gain on it expressed relative to that time, while the second $1000 would have been invested for a shorter time.

There are two (at least) conventional definitions of personal return that are used. One is internal rate of return and the other is time weighted average return:

https://en.wikipedia.org/wiki/Internal_rate_of_return

IRR is also the same as money weighted rate if return (This article also discusses differences between money and time weighted returns).:

https://www.investopedia.com/terms/m/mo ... return.asp

https://www.investopedia.com/terms/t/ti ... tedror.asp

Of these two the relationship between how your investment is performing is probably more obvious for time weighted average than for the concept of IRR, which is more obscure with respect to the basic idea of return. However, it is true of both that the result of either will equal the simple return for a period if there are no cash flows.

Here is a general article on return: https://www.cfainstitute.org/-/media/do ... 1v1r4.ashx
UpperNwGuy
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Joined: Sun Oct 08, 2017 7:16 pm

Re: Personal Rate vs. Investment Rate of Return

Post by UpperNwGuy »

mew wrote: Sat Oct 23, 2021 1:02 pm My 1 Year Personal Rate of Return is 15.23% and my Investment Rate of Return is 24.29% = 9.06% difference?
Who is doing the calculating, you or your broker?
Broken Man 1999
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Location: West coast of Florida, near Champa Bay !

Re: Personal Rate vs. Investment Rate of Return

Post by Broken Man 1999 »

Our index fund/ETFs are earning/appreciating at the rate of the index.

Some changes are made, as we sell assets for expenses each month, and rebalance as necessary.

Over all my individual stocks have done well over the years, Microsoft especially. Even my GE stock has been in the black for some time.

The only change in holdings has been adding long-term treasury index ETF. I added it for legacy reasons, intermediate-term treasury index better matched my horizon.

Since we hold so much in bonds, our portfolio return is much less than our equity index funds, but I'm very OK with that situation.

Even with a decent amount of bonds, we are banking multiple years of expenses. A low withdrawal rate makes it possible to keep growing the portfolio.

No idea when the equity run will end, but when it does we will still have a bunch of bonds/bond funds that will allow us to continue our comfortable retirement.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Topic Author
mew
Posts: 3
Joined: Sat Oct 23, 2021 12:47 pm

Re: Personal Rate vs. Investment Rate of Return

Post by mew »

UpperNwGuy wrote: Sat Oct 23, 2021 4:08 pm
mew wrote: Sat Oct 23, 2021 1:02 pm My 1 Year Personal Rate of Return is 15.23% and my Investment Rate of Return is 24.29% = 9.06% difference?
Who is doing the calculating, you or your broker?
Broker...Fidelity website.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Personal Rate vs. Investment Rate of Return

Post by dbr »

mew wrote: Sat Oct 23, 2021 5:24 pm
UpperNwGuy wrote: Sat Oct 23, 2021 4:08 pm
mew wrote: Sat Oct 23, 2021 1:02 pm My 1 Year Personal Rate of Return is 15.23% and my Investment Rate of Return is 24.29% = 9.06% difference?
Who is doing the calculating, you or your broker?
Broker...Fidelity website.
Typically, presumably also at Fidelity, brokers use IRR to compute personal return. I suppose the other return would be the weighted CAGR for the year of the funds making up the current portfolio holdings. I have had accounts at Fidelity for decades and can't say I have ever looked at these numbers. I do know the best education I got regarding IRR was the set of footnotes to a "personal return" posting for my 401k (not at Fidelity).
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