Comparing historical performance of different accounts

Question

I have several different investment accounts, and I'm trying to compare the historical performance between them.

Some of the accounts are easy: I have a couple of different accounts that are invested in one mutual fund, and I have not added any money to the account in years. I can just look at the balance of what the account was years ago, look at it today, and compare. All fees and expenses are already accounted for.

However, I have another account that is a managed account. It is continuously buying and selling various funds inside it. Of course, there are expenses, both in the managed account itself and in the funds that the account owns. In addition, I add money to it monthly. I can't just look at the balance before and after, because this wouldn't take into account the fact that I added my own money to the account each year.

Is there a good way I can compare my accounts to see which has performed the best historically?

Answer 1

You are looking for the Internal Rate of Return. If you have a spreadsheet like Microsoft Excel you can simply put in a list of the transactions (every time money went in or out) and their dates, and the spreadsheet's XIRR function will calculate a percentage rate of return.

Here's a simple example. Investment 1 was 100,000 which is now worth 104,930 so it's made about 5% per year. Investment 2 is much more complicated, money was going in and out, but the internal rate of return was 7% so money in that investment, on average, grew faster than money in the first investment.

Answer 2

You can evaluate portfolio raw returns or risk adjusted returns.

To evaluate raw returns, I would personally compute the total returns over the time period in question for both portfolios. To compute total returns, split the time into a bunch of subperiods by the dates at which you contributed money. Compute each subperiod return by dividing the value of the portfolio at the end of the subperiod (but before adding additional cash on that day) by the value at the beginning of the subperiod (after adding cash on that day). Then multiply all these returns together. Finally, subtract 1. That's your total return. For the portfolio where you didn't add any money it's easy: just divide the end value by the beginning and subtract 1. Whichever has a higher return performed better.

To compute risk adjusted returns, get the portfolio returns from both portfolios (daily or monthly) and use OLS to regress on a benchmark portfolio return (something like the S&P500). The intercept of the regression is a measure of the risk-adjusted peformance of your portfolio. Higher the better. More sophisticated models will do multiple regression using a few benchmark portfolios at the same time.