Measuring your return
You made money — but at what rate, over what period, and compared with what?
6 of 6 chapters published
Chapters
Beginner
- Absolute return and why it misleadsAn absolute return has no time in it, which makes it the only honest figure for a short period and a useless one for comparison. SEBI's own rules draw the line at a year, and for a reason worth understanding.
- CAGRThe constant rate that would have taken you from the start value to the end value. It is the right comparison across periods and it deliberately hides everything that happened in between.
Intermediate
- XIRR, the honest one for a SIPWhen money goes in on many dates, there is no start value and no end value to divide. XIRR finds the single rate that makes every dated cash flow consistent with what you have now — and it is the only figure that is about you.
- Time-weighted against money-weightedTwo correct answers to two different questions. One measures the investment and must ignore your contributions; the other measures your outcome and must include them. Most arguments about performance are this confusion.
Advanced
- Choosing a benchmark for your own portfolioA rate with nothing to compare it against is not an assessment. Your benchmark is not a fund's benchmark — it has to match your asset mix, be investable, and be chosen before you see the result.
- Risk-adjusted returnTwo portfolios with the same return are not equally good if one of them nearly destroyed you on the way. Dividing excess return by volatility is the standard fix, and the standard fix has known defects worth stating.