Someone brought to my attention: "I finally found a good example on why using networth to measure XIRR can influence results. Ref. to buddy post."
"If your $3k stock become $1.5k after a year, the loss is 50%. Yet by injecting cash to sit idle in the portfolio, the poor performance has diluted to become XIRR=-30%. That will make the investor happier but it does nothing to his pocket. In fact, the poor performance could be diluted even further to -1% by injecting more cash to sit idle in the portfolio. "
Createwealth8888's way of using XIRR is to measure the true investing performance on our portfolio based investible capital and not to include VIRGIN cash idling somewhere as investible capital.
One way is to have dedicated bank account for investment purpose and only idle cash that has been previously invested in this account is included in XIRR measurement.
Only when this investment account runs out of money and you need money to buy new stock, you then transfer the exact amount of cash from other bank account to this investment account to pay the newly stock purchase. It is how you can keep VIRGIN cash outside your investment account.
We should never be in an illusion of better XIRR performanance by injecting cash in a falling Bear market to improve XIRR. It is nonsense!
Stock Investment Portfolio = Current stock value at market closing price + Investible cash available
= Capital + Realized P/L + UnRealized P/L
and XIRR this stock investment portfolio to measure our investing skills
Read? Two Bank Accounts? No, You may need Four! - (4)
Now you may know why I need four bank accounts.
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A coin always has 2 sides. Though cash might help improve XIRR during bear market, more than often, cash is dragging down overall return as it does not return more than its face value.
ReplyDeleteThink about another scenario. A person with wealth of 1 million, but only invested 1,000 into a stock and the stock flies and a ten-bagger. So what kind of return really can reflect this situation? XIRR with total wealth or XIRR with only one transaction?
A person with wealth of 1 million, but only invested 1,000 into a stock doesn't fix into any definition of successful stock investors.
DeleteI believe that the point is more about how to be a wealthy person(total wealth) rather than how to be a successful investor. Cash management is also an essentially part of the equation in being rich, isn't it?
DeleteThat's one of the reason why I believe more in CAGR/XIRR in total wealth (cash+portfolio) than simple portfolio itself, especially, if one is retired.
Once I reach certain level of wealth, I don't be bother with CAGR/XIRR or investing performance to build up wealth anymore. It will be more on maintaining healthy cash flow and beating inflation.
DeleteWhen we are small, we think big. When we are big, we think small.
Hi, Try Microsoft Money. i think it will give you the answer. The sweetest thing is it is free now. On one condition you must feed back here for the benefit of everyone, what is the result of testing this financial software. Well actually it is up to you. i am pulling your legs only. Ha! Ha! i am a happy user for many years already. And i can not find any fault with this software- provided you don't GIGO this software.
DeleteHow to become rich in stocks???
ReplyDeleteSecond, Their winning position sizing:
It is quite common for successful retail investors to hold winning position size that is X% or XX% of their Net Worth. Read again. It is NET WORTH!!!
Of course it's NET Worth. Microsoft Money let you do everything. You can track anything you want concerning money. You can track your stock portfolio, all the cash you have at all the places, rent-seeking properties, etc... In fact everything under the sun under individual file then combine them together to see your NET WORTH. You really don't have to worry about anything about formula, work procedure or anything. Only watch out don't GIGO the software and then think MICROSOFT MONEY DOESN'T WORKS.
DeleteNB:
Just like a company, how you manage your cash flow (Assets Allocation) will determine your NET WORTH in the end. I think some of us are really K but don't try be KK. After all if you use MICROSOFT EXCEL SPREED-SHEET, can you do everything so easily like what MICROSOFT MONEY does for you. All you have to do is make sure data i/p are not GIGO. And may i ask where MICROSOFT MONEY comes from? You are actually trying to invent or beat MICROSOFT MONEY. HA! HA!
I know i am not K, so i use real K-people's software(FINANCIAL SOFTWARE) and not trying to be KK. HA! HA!