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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.