How can we measure portfolio performance? Do you know that the returns that are seen in the blogs or newspaper may be imprecise?
Recently, Interative Investor Blog (IIB)has two posts that cover them. I find them quite interesting and relevant. The posts:
http://blog.iii.co.uk/2007/10/08/249/
http://blog.iii.co.uk/2007/10/12/returnagain/
Prior to reading the posts, I use unit value method and monthly time-weighted method to compute my portfolio performance. The unit value method is used to give me a weekly price of my portfolio, while I use the monthly-weighted method for a real-time returns. The returns are year-to-date returns.
IIB's posts introduces XIRR (a form of internal rate of return computation) method. I have tried out the XIRR. XIRR measures the yearly internal rate of return. Hence, it would give me a higher percentage return (compared to the returns I am already computing) This is becasue XIRR would adjust the year-to-date 2007 return to an annual return. Or a higher return in a shorter period would translate to a higher annual return.
Hopefully, IIB will have a one more post to round up the discussion on measuring portfolio returns.
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