> From: Charles Day [EMAIL PROTECTED]
> IRR is a really good way of measuring performance and one that I use all the
In a previous post, I hinted that there were some a possible objection to using
IRR. IRR assumes that you are able to obtain that rate throughout the whole of
the peoriod.
So if you bought some shares for $100 on 1 Jan, and sold them for $150 on 1
Jul, then the IRR is 125% (being 1.5 ^2 -1). It assumes that the $150 you sold
your shares for can be invested at a rate of 50% per half-year.
However, I'm not too concerned with this objection - and to put a long story
short, I feel it pretty much all comes out in the wash, anyway. Other methods
have their problems, too. I always use IRR when working out performance - it's
the one that makes the most sense, and I can compare the aggregated results
against the index. I don't include dividends in my calculations, although one
could argue that I should.
> Your IRR may be 20%, which is nominally better than the 5%
> interest that your local bank pays, but whether or not your investment was
> genuinely better than a bank account depends on how much riskier that
> investment was.
I think one problem is "how do you define risk"? The way they do it in CAPM
(Capital Asset Pricing Model) is to look at the volatility of the share price.
I don't like that definition, though. For me, I guage my performance against an
index (in my case, the Footsie), and figure that as long as I can consistently
outperform it, then I'm doing well.
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