Why do we need to invest most of our money (saving)?
Why not just keep it in the bank?
Inflation!!!!
We all know that inflation will erode the value of our money over long run.
We cannot afford to look at absolute dollar value over long run when we invest.
For example,
$10,000 return on investment in 2012 is definitely worth less than the $10,000 return on investment in 2001 in term of purchasing power due to inflation eroding the value of the money over the years.
Another example,
Let assume the yearly inflation rate from 2001 to 2010 is at 3%.
Investor A has started investing $100K into the stock market on 1 Jan 2001 and at 31 Dec 2010, his portfolio value is $121,899. He has made an absolute investment gain of $21,899. He may be happy with his return of $21,899 if he is ignorance of inflation.
Investor B also started investing $100K at the same time and at 31 Dec 2010, his portfolio XIRR is 4%. He has beaten the inflation rate of 3% and has real return of 1% i.e 4% - 3% = 1%.
Investor A without measuring his portfolio value will not know his real return after inflation. If he has measured his portfolio value at 31 Dec 2010 using XIRR, his portfolio XIRR will be 2%. His real return is actually negative 1% hor!!!!
Any one still thinking loud that it is meaningless to use XIRR or CAGR to measure your portfolio value over long run? I said again long run hor!!!
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