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stopdropnrol
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my performance numbers look great while my dollar values are in the dump. I figured maybe some one here would know this. Is the stated average rate of return corrected in anyway? for example the stopdropnrol500 is at 100, it tanks to 50. the next year it rebounds to the original price of 100. yr 1 ror =-50%, yr2 ror=100% , inception average ror =25%.

8/21/2019 8:52:09 PM

A Tanzarian
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Wouldn't average rate of return be 0% in your example?

Sometimes they assume you're reinvesting dividends or some other scenario. You'll have to look at the fine print.

8/22/2019 12:03:17 AM

stopdropnrol
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That's kind of my question. Is the rate of return based on actual increase of dollar value or just % change?

8/22/2019 1:06:25 PM

A Tanzarian
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It's a rate, so it's a percentage change.

Rate of return is normally a percentage change in share price over some period of time.

The rate of return you see in your portfolio -- i.e., the percentage change in value of your investment account -- will likely be different than the rate of return on the underlying shares. Your personal returns depend a lot on timing.

Using your example, if you invest all of your money at the beginning of the two years, you'll end up with zero return at the end (the same as the shares). But if you invest half at the beginning and half at the one year point, you'll end up with a 50% return in your account even though the rate of return on the underlying share over the two years is still zero. You can also imagine scenarios where your investment has negative returns and the held shares have positive returns.

Dividends and what you do with them can also cause differences between your actual returns and individual share returns.

8/22/2019 1:50:07 PM

NCSUMEB
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Average rate of return is different than CAGR, compounded annual growth rate. Many outlets use them interchangeably but I only look at CAGR ((ending value divided by beginning value) raised to the 1/n, -1) and they should of course state if divs are re invested.

If they don't mention it, then dividends should be considered reinvested. This is also a "glitch" when managers show the their large cap funds against the S&P over 5/10/15/20 years with their fund beating the S&P and having an asterisk and then at the bottom stating S&P divs aren't reinvested for the CAGR.

8/22/2019 3:31:41 PM

David0603
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You can't just add the averages together and divide by number of years. That's not how averages work.

8/22/2019 4:35:46 PM

stopdropnrol
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That's exactly how averages work but I see the point that it has to include the $ already invested for the next calculation. I guess my question was more simple than I thought. historic performance percentages are poor indicators of actual gains in value.is that fair to say?

8/24/2019 8:16:30 PM

David0603
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I don't know what you mean when you say "average rate of return"
Are you looking at returns since inception on a fund you bought 1-2 years ago?

8/26/2019 8:03:40 PM

stopdropnrol
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my example was over 1-2 years for simplification . my question was about how the numbers we traditionaly hear and believe are calculated.

9/10/2019 1:24:13 AM

A Tanzarian
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https://en.wikipedia.org/wiki/Rate_of_return#Mutual_fund_and_investment_company_returns

9/10/2019 2:24:26 PM

CaelNCSU
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Geometric mean?

9/11/2019 12:08:26 AM

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