2

What is the way to calculate the annual return of my mutual fund investment? At any moment I can see the current market value of my investment, but this number comprises 3 things: market fluctuation, new money of mine coming in, and re-invested dividend.

More philosophically, should I care about this annual return rate? If not, what should I care about to estimate the trajectory of my long-term net worth?

EDIT: I'm using Vanguard mutual fund, in case Vanguard produces these numbers for my convenience.

  • Don't you receive a statement from Vanguard? It would be periodic, but this should show you your return as well. – JAGAnalyst Nov 11 '14 at 18:07
1

Toward the philosophical side of your question, it seems to me that what is most important is knowing how well your fund is performing versus it's benchmark. This is an actionable piece of information that can help you get out of an under-performing fund, although if you're already using Vanguard it's likely a low cost and broadly diversified fund. Ultimately, what you want to avoid over the long term is under-performing the market due to high fees, market timing, poor fund selection etc., and selecting a fund that closely tracks the market seems to be the best way to achieve this, assuming that you intend to be a passive investor.

I don't see a clear benefit to calculating a personal rate of return. If the fund is performing well versus its benchmark, you are likely to stay with it, and if it is performing poorly, you are likely to pull out. At the end of the day, the complicated accounting won't actually change the amount you've got in your account, so I'd recommend picking a good fund, checking up on it once in a great while, and putting your time to better purpose.

3

There are at least a couple of ways you could view this to my mind:

  1. Make an Excel spreadsheet and use the IRR function to compute the rate of return you are having based on money being added. Re-invested distributions in a mutual fund aren't really an additional investment as the Net Asset Value of the fund will drop by the amount of the distribution aside from market fluctuation. This is presuming you want a raw percentage that could be tricky to compare to other funds without doing more than a bit of work in a way.

  2. Look at what is the fund's returns compared to both the category and the index it is tracking. The tracking error is likely worth noting as some index funds could lag the index by a sizable margin and thus may not be that great. At the same time there may exist cases where an index fund isn't quite measuring up that well. The Small-Growth Indexing Anomaly would be the William Bernstein article from 2001 that has some facts and figures for this that may be useful.

1

Note that mutual funds' quarterly/annual reports usually have this number.

I generally just let my home-accounting software project my future net worth; its numbers agree well enough with those I've gotten from more "professional" sources such as monte-carlo modelling. (They'd agree better if I fed in all the details of my paycheck, but I don't feel like doing the work to keep that up to date.) I'm using Quicken, but I assume MS Money and other competitors have the same capability if you buy the appropriate version.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .