Let's say you are in the accumulation phase and are dollar-cost-averaging into a mutual fund. You get your mutual fund statement at the end of the year and it tells you that the fund returned X amount that year. Was that YOUR actual return? Most likely not. Why? Because you invested at different times during the year. The mutual fund's reported rate of return is based on the assumption that you invested on January 1st and held it until December 31.
So, what is a Personal Rate of Return? It is the ACTUAL rate of return that you receive.
How do you calculate it? There are a number of ways. I'll show you a way that I learned about. I must warn you, this is a pretty involved method for calculating personal ROR (also known as a time-weighted ROR). Also, some of you will notice that there are shortcuts that can be taken in some of the steps. I'm going to go the long way around so that hopefully everyone can understand this.
EXAMPLEFor this example, we will say that you started on January 1, 2004 with zero dollars in your account. We will assume that you set up your account for automatic investments of $100 to be made on the last day of each month. For this example, we will use Vanguard's S&P 500 Index Fund (VFNIX).
Step 1. Calculate the number of shares purchased for each time period. Here are the monthly closing prices and number of shares purchased for VFNIX:
Purchase Shares
Price Purchased
01/31/2004 104.54 0.95657165
02/29/2004 105.98 0.94357426
03/31/2004 104.01 0.96144601
04/30/2004 102.37 0.97684869
05/31/2004 103.76 0.96376253
06/30/2004 105.41 0.9486766
07/31/2004 101.92 0.9811617
08/31/2004 102.31 0.97742156
09/30/2004 102.99 0.97096806
10/31/2004 104.55 0.95648015
11/30/2004 108.78 0.91928663
12/31/2004 111.64 0.8957363
Step 2. Figure out a running total for each purchase. This step is pretty involved. Shares Price Total
1/31/2004 Initial Purchase 0.9566 104.54 $100
2/29/2004 Purchase 0.9436 105.98 $100
Previous Balance 0.9566 105.98 $101
Total 1.9001 $201
3/31/2004 Purchase 0.9614 104.01 $100
Previous Balance 1.9001 104.01 $198
Total 2.8616 $298
4/30/2004 Purchase 0.9768 102.37 $100
Previous Balance 2.8616 102.37 $293
Total 3.8384 $393
5/31/2004 Purchase 0.9638 103.76 $100
Previous Balance 3.8384 103.76 $398
Total 4.8022 $498
6/30/2004 Purchase 0.9487 105.41 $100
Previous Balance 4.8022 105.41 $506
Total 5.7509 $606
7/31/2004 Purchase 0.9812 101.92 $100
Previous Balance 5.7509 101.92 $586
Total 6.7320 $686
8/31/2004 Purchase 0.9774 102.31 $100
Previous Balance 6.7320 102.31 $689
Total 7.7095 $789
9/30/2004 Purchase 0.9710 102.99 $100
Previous Balance 7.7095 102.99 $794
Total 8.6804 $894
10/31/2004 Purchase 0.9565 104.55 $100
Previous Balance 8.6804 104.55 $908
Total 9.6369 $1,008
11/30/2004 Purchase 0.9193 108.78 $100
Previous Balance 9.6369 108.78 $1,048
Total 10.5562 $1,148
12/31/2004 Purchase 0.8957 111.64 $100
Previous Balance 10.5562 111.64 $1,178
Total 11.4519 $1,278
Step 3. Calculate the individual returns for each time period. To do this, you simply use this formula:
[(This month's closing balance - Current month's purchase)/Previous month's balance]-1
For the month of February, the numbers would like this (I rounded the numbers for simplicity's sake):
[(201 - 100)/100]-1
[101/100]-1
[1.01]-1
.01
You would repeat this process for March - December. Here's what your numbers should look like not rounded:
Feb 0.013775
March -0.01859
April -0.01577
May 0.013578
June 0.015902
July -0.03311
Aug 0.003827
Sept 0.006646
Oct 0.015147
Nov 0.040459
Dec 0.026292
Step 4. Calculate the Personal Rate of Return
Here's the formula for this step:
{[(1 + Feb Rate) X (1 + March Rate) X ...]-1} X 100
It should look like this:
{[(1 + 0.013775) X (1 + (-0.01859)) X (1 + (-0.01577)) X ...]-1} X 100
Your final answer should look like this:
{[1.067917] - 1} X 100
.067917 X 100
6.7917%
WHEW! That's a lot of work to find out that your personal rate of return for this example is 6.8%! Now you know why a stockbroker doesn't furnish this information!
If you are interested, send me an email and I'll send you a copy of the Excel file I used to calculate this example.
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