measuring ROI in investments

[rbroome]

I hope knowledgable folks here can help me.
I literally cannot make up my mind on how to measure the performance of my investments in an IRA. The IRA is invested in a combination of stock and bond mutual funds. It is a very vanilla type of account.

I want to understand how to measure it’s performance.
When I look at the historical values, as one would expect they jump around, but generally trend upward.

The first method I use is: Take some value in the past, say when the account was opened or one year ago or first of the year or some other point in the past, take today’s value, difference the amounts and divide by time. The % is the growth. As one can readily see, this is a noisy number, but as real as it gets. If I sold all my holdings today, this would be what I earned. The problem is the noise. We are measuring a derivative. One week I get one number, a week later I get a very different number. I can pick any number of points in the past to use in this calculation and get very different results.

I then calculated the increase (decrease) for each time period (N-1 values where N is the number of measurements) and calculated an average. Interesting, but I don’t know how to interpret it.

I then tried a linear regression of the plot of value over time. I get a) a single number and b) is almost never the same as what would happen if I sold that day. It isn’t noisy though.

I don’t know what to do to decide if my account is doing well or not.
What do you folks do?

thanks

[ultrafilter]

It’s slightly complicated because you’re presumably making deposits on a regular basis. Best to ask a financial advisor if you have access to one.

Edit:

@rbroome

The first method I use is: Take some value in the past, say when the account was opened or one year ago or first of the year or some other point in the past, take today’s value, difference the amounts and divide by time. The % is the growth.

Don’t do this. This is the classic snake oil salesman’s method of computing growth.

[Dano83860]

Go to Morningstar.com. They have unbiased information about your mutual funds. You can join for free and access everything except the premium content.

[allotrope]

You want to do a NPV calculation where you solve for the interest rate. In other words, find a net present value calculator and plug in the future value and present value then ask it to tell you the implied interest rate.

Some calculators will even give you the option to enter intermediate cash flows and other complexities. Excel also handles NPV and related calcs.

[rbroome]

@allotrope

You want to do a NPV calculation where you solve for the interest rate. In other words, find a net present value calculator and plug in the future value and present value then ask it to tell you the implied interest rate.

Some calculators will even give you the option to enter intermediate cash flows and other complexities. Excel also handles NPV and related calcs.

Thanks!

[rbroome]

@ultrafilter

It’s slightly complicated because you’re presumably making deposits on a regular basis. Best to ask a financial advisor if you have access to one.

Edit:

Don’t do this. This is the classic snake oil salesman’s method of computing growth.

I thought so. It certainly seems like a dumb way to predict the future.