XIRR/CAGR: Investor's true performance indicator! (2)

Read? XIRR/CAGR: Investor's true performance indicator!

Investor A said: "I have made $100K passive income from the stock market in 2011"
Investor B said: "I have made $250K passive income from the stock market in 2011"

Wow, wow, wow! Did you say that?

You must be impressed by the number! You may actually go and congratulate them, and hoping to learn from them as well.

Sorry to tell you this!

You have been affected by "trigger" number! It is similar to "trigger" words used by SMOL in his sales tactics to earn higher commissions. They are powerful!!! Read? The pleasure of naked skin over leather...

Investment gurus who are conducting investment courses love to use "trigger" number and "trigger" words in their newspaper ads. It will help them to catch lots of potential investors to attend their free previews. During the previews, more "trigger" words and "trigger" numbers will be presented. Soon some attendees will be sucked into it and pay for the course.

As investors, we must learn to be savvy enough and not fall into "trigger" number used by investment gurus who are trying to impress upon us. We must equip ourselves with essential knowledge and skill to better gauge investment performance and read beyond "trigger" numbers and "trigger" words.

It is true that they may have made $100K from the stock market. But, so what? These "trigger" number said nothing about their investing performance. Absolutely nothing! By putting cash or income into their pocket is not the same as getting real return on their investment. Did the investment gurus tell you this? If no, why not?

Why do we invest in stocks?

When we invest in stocks; we are actually investing with expected yield and return; and also to accept the risk of capital loss too. But, we don't expect capital loss when we place a buy order. Nobody with a sound mind will execute a buy order while expecting capital loss upon buying. Nobody!

Investors who are not ready to accept capital risk will continue to stay at the sideline to watch the market actions.

In short, stock investing is about expected yield and return; and acceptance of capital risk so our investment performance measurement must reflect that too.

Yield and Return

When we say return, we are actually referring to Total Return or Total Shareholder Return (TSR)

As investors, we should be using both Yield and TSR to measure investment performance on stocks. We must also know the difference between Yield and TSR.

It is very important to know that. Read? Don't Be a Yield Pig

Did you understand the moral of the story in that article? If not, read again.

Yield measures income or cash received from stock but totally ignore capital gain/loss while TSR takes into account of measuring both yield and capital gain/loss. TSR is a better measurement of a stock investing performance.


For example, when investor A invested $1M in stocks and received $100K in stock dividends.His yield on his stocks investment is 10%

$100K passive income at 10% yield!

Wow, wow, wow! Did I hear you saying that again?

Again, the "trigger" number of $100K and yield of 10% tell us little about investor A's real investing performance.

For example, what if, the market value of his stocks investment has dropped to $800K and that is -20% capital loss even though it is an unrealised loss. But, TSR will measure both yield and capital gain/loss so his TSR = 10% (yield) - 20% (unrealised capital loss) = -10%. 

Despite, putting $100K into his pocket, investors A is actually experiencing negative growth of -10% when that measurement was taken.

In conclusion, by putting cash or income into our pocket is not the same as measuring the true performance on our investment.

XIRR and TSR

What is the key difference between XIRR and TSR?

The key difference is XIRR will include measurement of investment performance over a time period so XIRR is a better option as an investor's true performance indicator.

Have you started using XIRR to measure your portfolio performance? If no, why not? Any good reason for not doing it?