Annual Return Reporting

12/16/2007, at 2:56 am

This is one of those dirty little secrets that really gets under our skin about this business…

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Every year, Mutual Funds, Investment Managers, Services, Systems and other entities that manage investment portfolios, report returns for the quarter, YTD, 1-year, 3-year, 5-year, etc… 

Most of the time, investors with money in these services are left scratching their heads trying to figure out why their individual returns weren’t as good as those that their fund or investment managers reported.

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The answer is quite simple really, and the primary reason why investors should never, and we do mean never, trust any claims that investment managers or funds make about actual returns…

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First, and most unfortunately, many of the less eithical entities simply lie about the returns so they won’t lose any clients or investment business, and as a result, lose any of those hefty fees they charge investors.  Those fees, and those fees alone, make up the bulk of the profits that these entities make.

Second, and another unfortunate truth, is that anybody can manipulate numbers and percentages to support almost any conclusion, whether or not that conclusion bares any resemblence to actual facts or performance.

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In figuring your returns, the only numbers that matter are these… 

1) Your balance at the beginning of the year…

2) Add any contributions (or subtract any withdrawals) that you made during the year…

3) Your balance at the end of the year.

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That’s it. Period.

Once you have those three numbers, the equation for determining your return is quite simple…  Beginning balance + contributions = Total contributions.  Then subtract your total contributions from your year-end balance, and THAT is your return for the year.

For example, if your balance on Jan 1 was $100,000, and you made $20,000 in contributions during the year, and your balance at the end of the year was $133,000, your annual return is calculated… 

$133,000 (year-end balance) minus $120,000 (total contributions), equals $13,000 profit…  Divide the profit by $120,000 (total contributions) and that gives you your return for the year, period.

In this case your return for the year would be 10.83%

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In another example, if we suppose that your year-end balance was $117,000…

The equation would be $117,000 minus $120,000 equalling (-$3,000), a loss.  Your return for the year would then be (-$3,000) divided by $120,000… or a (loss) of (-2.5%).

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So, do the simple math for yourself and NEVER take anybody’s self-interested calculations as a sign of anything other than trying to twist the numbers to benefit them first, and you…  somewhere down the list…

Any and all questions or comments are welcome.

Coach BD

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