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In tracking how your investments are doing, there are several ways to measure performance, but they don’t all tell the same story:
Each method offers something different depending on the context, lump sum vs. ongoing contributions, investor vs. fund manager perspective, etc.
1. Which return metric do you personally rely on most and why (IRR, CAGR, etc.)?
2. Do you think most people understand the difference between simple average and CAGR — or do you think this is an overlooked source of confusion?
For HD spreadsheet aficionados, the Personal Investment Returns Spreadsheet posted on Bogleheads provides an easy way to track your investment performance. It calculates money-weighted rate of return (IRR) and time-weighted rate of return from monthly cashflows and balances. For a lump sum investment the rates of return are identical, but for ongoing investments they are different primarily due to the vagaries of Mr. Market. However, as in my case, it can also point out behavioral mistakes (MWRR << TWRR). Because I didn’t know what I was doing, I got burned by the Dot-com boom and bust. The tool also allows a comparison of your previous investment choices with what would have happened had your cashflows been invested in a benchmark fund instead. I wish I knew then what I know now… I still haven’t achieved the fourth stage of index investing (1. Darkness. 2. Enlightenment. 3. Complexity. 4. Simplicity.)
My mindset is to think in terms of risk-adjusted return in retirement. There is a calculation for it but I don’t bother.
I prefer using the XIRR function offered with Excel. It allows more flexibility with cash inflows and outflows and also handles multiple years. It’s been a helpful tool for analyzing both traditional investment account returns and also real estate investment returns.
The mutual fund and ETF performance measurement I most value is the hypothetical growth of a $10,000 10-year investment with reinvestment of dividends and distributions. At Schwab’s http://www.schwab.com/research/mutual-funds/quotes/summary (no log-in required) the investment result stated as the cumulative dollar amount can be viewed or downloaded in a “report card” pdf file.
The cumulative performance over the prior 10-year period seems like a good way to integrate the shorter term ups and downs. Yes, past performance is not a guarantee of future performance but it does seem like there may be some correlation. And if investment X performs better than investment Y for a 10-year period it seems like that relationship may continue into the future (at least for a while) even if both investments are impacted by market events and changes.
Example broad market index fund $10,000 10-year performance stated as growth in dollars and as equivalent compound interest rates (as of April 30, 2025):
QQQ $46,803 15.44% Nasdaq-100 index fund
SWPPX $31,419 11.45% S&P 500 index fund
SWTSX $29,459 10.80% Total U.S. stock market index fund
VT $22,980 8.32% Total world market index fund
Not coincidentally I avoid funds that have less than 10-years of history. I also look at the historic performance back to a fund’s inception, especially performance during recessions and other severe market events. And I ask myself what would my current investment portfolio do during these events and if I would be OK with it.
Circumstances: I own individual stocks as well as ETFs and mutual funds. I automatically reinvest most dividends using DRIP (Dividend Reinvestment Plan). In the period 2023-2025 I made three stock purchases excluding the purchase of CDs, Treasuries and the automatic purchase of shares via dividends. I didn’t sell anything:
11/17/2023 Bought stock
4/29/2024 Bought stock
11/22/2024 Bought stock
Including everything, all purchases Including DRIP from 2023 to date: 133 trades
Because some dividend cash goes to savings each year and I have been taking withdrawals I monitor Net Worth and CAGR (Compound Annual Growth Rate). My numbers go back to 1995. Prior to that I used speadsheets. More important to me is Net Worth because it is a summary of everything.
One of the disadvantages is the data input, which requires tracking all income, sources, expenses, dividends, interest, assets, depreciation, etc. Much of this is automated, in particular the investment accounts and most expenses (I segregate using several credit cards). It is not as arduous as it might seem.
I find certain things fascinating, such as 30 years of income versus expenses. Over that period 22% was saved. I don’t know if that is good or bad, but it does indicate how my finances got to this point. It is my perspective that money has to first be saved so as to invest.
For each year from 1995 to the present the data includes “Starting Net Worth” “Regular Income” “Investment Income” “Realized Gains” “Unrealized Gains” “Total Income” “Expenses” “Net Income” “Net Income as %” “Funds Added” “Funds Removed” “Ending Net Worth” “Net Worth % Change”. These are totaled year by year and the result is CAGR.
“My numbers go back to 1995. Prior to that I used speadsheets.”
If you aren’t using spreadsheets now, how are you aggregating the data for analysis?
I suppose I should have stated that prior to 1995 I exclusively used spreadsheets. Today some is via spreadsheets then into Quicken, but most is imported directly into Quicken using account data (brokerage and retirement accounts, banks, expenses via credit cards, utilities, etc.).
Quicken generates a variety of tailorable reports that can be used “as is” or can be exported to spreadsheets.
My spouse also has a hybrid portfolio of individual stocks, ETFs and bonds. Tracking hers and mine individually and combined is a goal, too. I’ve used Morningstar’s portfolio manager to track mine, hers and all combined. Data is usually imported on quarterly intervals, but sometimes only at the end of the year.
The Performance Benchmark I use is the one I constructed 30 years ago as part of a “Lifetime Plan”. Have we met the goals set then, or not? and why? My interest is and remains funding all of our activities throughout our lives, including Long Term Care, with some leftover to gift.
If you are a buy and hold Boglehead type investor, who has a mix of index ETFs which are trying to emulate average market returns, there is no need to do this kind of thinking. You know you will have returns, regardless of how calculated, that are close to how the overall market is doing. I mean, you already know that your shares of VTI will have performed as well as the index.
Only folks who are trying to beat the average need to make this kind of calculation for their selected non-index “investments”.
Not true in my case. If I had three ETFs, for example Vanguard US market, Vanguard ex- US Market, Bond and cash, then I would run my numbers anyway. Allocation makes a difference.
But would you change your allocation based on performance numbers? Surely that is market timing.
Since you own individual stocks in addition to ETFs/index mutual funds, I wouldn’t consider you a Boglehead type investor. Understanding your investments’ performance would be more difficult that if you had a 3fund type of portfolio….
I just look at what Vanguard tells me… when I look at all.
I’m the same Kathy. On Vanguard I look at the personal return, and also the cumulative return (in dollars). Not too long ago I looked at when I first hit 100K, 200K, etc cumulative returns. If you look at it, it demonstrates compounding of returns real well. It takes a long time to get From 100K to 200k, but the following 100Ks come closer and closer together time wise. It’s a real eye opener showing a well known fact.
Fred, thanks for an interesting question. I remember studying the various measures of return in my CFP class as part of the Time Value of Money portion. I enjoyed it and learned a lot. I have not run across many people who were inclined to make the effort to understand many of these fundamental finance topics, even among engineers and scientists. The best example I know of of the general confusion about calculating returns is the famous Beardstown Ladies Investment Club. They published a book about their investment club that claimed a 23% return. After publishing 4 other books, it was determined they didn’t account for member dues correctly, and that the actual return was around 9%, not bad but below the SP500 for the period. My guess is they used a CAGR when they should have used an IRR.
Like all tools, they each have their use. The major financial institutions provide personal estimates of portfolio performance. Vanguard’s dashboard provides investment returns as well a rate of return. They provide a link that gives a description their performance calculation. They use an IRR calculation that considers the timing, and amounts, of inflows and outflows. I assume Fidelity, Schwab and others do the same. But my understanding is that a mutual fund’s performance is based on a TWR.
Simple averages can be very misleading. CAGR is basically an example of compound interest.
No metric. And I sure don’t understand the difference.
My measure is simple. Is the total account balance going up more or less regularly including earnings distributions?
The Fidelity website tells me my return rate over the period of time I select and compares them with benchmarks.
I don’t trade. I have had the same investments more or less 20 years.
Thank you, Dick, I am glad it is not just me who doesn’t understand the difference. Chris
For me it’s KISS.