What's my true return?

Quoting hilmy83

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This is for those who know more math than me

How do you calculate true return?

People always ask me about my return, but I don't really know the true return because I always add to my account. So for example if I started with $1000 and I made $500 middle of the year and also added another $1000 then I made $300 end of the year, what's my return? I know it's not 40%.

Is there a formula?

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Quoting In2Blues

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Your average rate of return with the numbers you provided would be 31%.

Google calculating rate of return and you'll find formulas like this one

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Quoting hilmy83

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actually i found this function called IRR (internal rate of return)..

so in my case i have (each row is corresponds to the month)

-1000
0
0
0
0
-1000
0
0
0
0
0
0
2800

IRR monthly = 3.56%
annualy IRR = 52.22%

I found it here
http://news.morningstar.com/classroo...&page=4&CN=COM

so i guess it depends on waht method you use

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Quoting hilmy83

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This is for those who know more math than me

How do you calculate true return?

People always ask me about my return, but I don't really know the true return because I always add to my account. So for example if I started with $1000 and I made $500 middle of the year and also added another $1000 then I made $300 end of the year, what's my return? I know it's not 40%.

Is there a formula?

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Quoting diallist

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Okay, here's the way I do it.

Balance at end of Year MINUS balance at start of year.

Then from that number, subtract any deposits made, and add back any withdrawals made.

Then divide this final number by your starting balance and multiply times 100 to get percent return for the year.

Using your numbers:

$2800 - $1000 = $1800 (End of Year MINUS Start of Year)

$1800 - $1000 = $800 (Subtract any deposits made during the year)

$800 + $0 = $800 (Add back any withdrawals made during the year)

$800/$1000 = 0.8
0.8 * 100 = 80% gain for the year.

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Quoting billflet

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Somehow that doesn't sound right.
Should the second line from bottom read $800/2000 = 0.4

It seems like an $800 gain on $2000deposited should be 40%.

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Quoting billflet

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Somehow that doesn't sound right.
Should the second line from bottom read $800/2000 = 0.4

It seems like an $800 gain on $2000deposited should be 40%.

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Quoting diallist

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It has to be $1000 because that was the account balance at the beginning of the period for which the percentage gain is being calculated. In this case that period is one year.

Let's do it this way, and calculate the percent gain to two six month periods.

Jan - Deposit $1000
Apr - Gain $500
Jul - Deposit $1000
Oct - Gain $300

For the period of Jan - Jun, the starting balance was $1000 and the ending balance was $1500. No further deposits or withdrawals were made.

$1500 - $1000 = $500
$500 - $0 = $500 (no deposits made)
$500 + $0 = $500 (no withdrawals were made)
100 * ($500 / $1000) = 50% gain for the first six months.

For the period of July - Dec, the starting balance was $2500 and the ending balance was $2800. No further deposits or withdrawals were made.

$2800 - $2500 = $300
$300 - $0 = $300 (no deposits made)
$300 + $0 = $300 (no withdrawals were made)
100 * ($300/$2500) = 12% for the second six months.

50% of $1000 plus 12% of $2500 = $800 total profit for the year.

In other words:

At the end of June, he had 500 more dollars in his pocket than he did in January, for a six month gain of 50%.

At the end of December, he had 300 more dollars in his pocket than he did in July, for a six month gain of 12%

At the end of December, he had 800 more dollars in his pocket than he did in January, for a TWELVE month gain of 80%

Now, I'm pretty sure I'm right, but I've been wrong before, and hate being ignorant, so if you see any errors, please let me know.

Thanks!

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Quoting hilmy83

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Ok i understand how you are looking at it. But, you are looking at the $800 profit in relation the initial $1000 deposit. I have two deposits totaling $2000 made at differnt times. It seems that you are neglecting the second deposit even though I see it in your calculation...



i'm confused...bring twoblink in here

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Quoting diallist

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Deposits and withdrawals made during the year are irrelevant. The only thing that counts is how much more money do you have at the end of the year than you had at the beginning.

Money Gained / Starting Capital = Period Gain

$800 / $1000 = 0.80 = 80%

If you made deposits during the year, that made your balance go up, not because you earned any money, but because you stuck it in there. You didn't earn that money by trading, so it has to be taken back out in the calculations.

If you made any withdrawals during the year, that made your balance go down, not because you lost money by trading, but because you yanked it out, so it has to be added back in in the calculations.

I hope this makes it a bit clearer.

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Quoting hilmy83

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true, but I said the last $300 were made after i deposited the second deposit. So the two deposits contributed to the $300 additional gain

I always use 2% of available core account equity to make trades. After the second deposit, my 2% increases not only from the $500 profit but also from the second $1000 deposit. So over time, the second deposit is affecting the return as well

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Quoting llambert3

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I can see Diallist's point, but it doesn't seem right. In the retirement world we have something called the personalized rate of return. Those of you with 401k plans may see this on your statements, or will in the future.

In that formula we calculate based on when deposits are made to the end of the period and subtract withdrawals. Basically getting a weighted average.

Wouldn't this be the same sort of thing? I think you have to count in the additional deposit on a weighted average.

The only way I can see the 80% is if you could've made the addl $300 without the deposit, but since that extra deposit was NOT working elsewhere for you in another interest bearing account, you should include it in your calculations. Otherwise, what was the point in depositing the extra money?

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Quoting diallist

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That's true hilmy. Your position size will be larger which in turn will give you a greater gain for a given number of pips.

BUT, you can't spend pips or percentages, nor do you have to pay taxes on pips or percentages. You spend and pay tax on cold hard cash.

Compare these two sequences:

Jan - Deposit $1000
Apr - Gain $500
Jul - Deposit $1000
Oct - Gain $300

Jan - Deposit $1000
Apr - Gain $500
Jul - Gain $300
Oct - Deposit $1000

In the first sequence the second deposit did contribute to the $300 profit because of a larger position size, but in the second sequence it had no effect.

How many new DOLLARS did you have at the end of each sequence? The same... $800. And that is what you can spend and pay taxes on. The timing of gains and deposits has no relevance (except you do have to have an initial deposit to kick things off).

I think where you're confusion might lie is in what you are calling your account balance. If at the beginning of the year, you had $2000 in a bank account designated as your trading account and you left $1000 in the bank for safekeeping and put the other $1000 into your brokerage account to trade with then in that case your starting balance for the year would be $2000. It isn't what is in your brokerage account that makes up your account balance. It is the total of all funds that you are calling your trading account, regardless of where they are stored. In this instance your gain for the year would only be 40% ($800/$2000). You can use $2000 because you knew in your mind on January 1st that $2000 is what you would be trading with.

On the other hand if you only had $1000 in your bank account and that is all you had to deposit with your broker, then THAT is your starting balance for the year.

Same would be true if you had $2000 and only designated $1000 in your mind to be your trading account, then THAT, again, is your starting balance.

Your starting balance is what you decide it to be at the beginning of the period you're wanting to calculate percentage gains for. It must be decided at the beginning. You can't change your mind once you've made your first trade with that money.

So, just remember hilmy, it's all in your head.

Dial

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