Aug 2, 2016

Cory Diary : Misleading CAGR

Smoothed return

It assumes a smoothed return over the period that’s measured. In reality, investments experience significant short-term ups and downs. Be careful when you are sold with 1 Year to 8 Years performance. On 7-8 years, there's a low due to GFC that time in 2008 on crash and huge recovery. All monkeys able to perform. Fine ! Not all monkeys just "99.5%".


Size of fund

What this means is that a fund manager can work on multiple small funds, and then select the few that happens to wins over the measured period and present them to you. Which will convince the most sceptic their performance. 


Ins and Outs

It doesn't work on personal equity investment which has multiple transactions. 

From Investopedia,

"CAGR is very straightforward when there is a beginning and ending value, and set period of time. But in reality, investments, such as mutual funds, have continuous cash inflows and outflows and are required to report monthly, quarterly, annual, and even daily returns."


Cory
20160802

5 comments:

  1. Cory,

    "Not all monkey just "99.5%"

    Thanks for the Tuesday morning humour!



    "It doesn't work on personal equity investment which has multiple transactions."

    Especially when the size of our portfolio grows mainly through our yearly injections of fresh funds.

    For eg, I have a $100K portfolio, and I am able to add $50K per year to it.

    So are we measuring our savings (and earnings) prowess, or are we measuring our investing acumen?


    Hmm...

    LOL!

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    1. If we think deep deep. Is to measure our Ego lah Ego ! LOL

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  2. Yah! End to end comparison in CAGR is misleading ,,, like what Jared said,, increased may come from saving ,,, same as mine case , portfolio value increase mostly came from saving n simple life style ,,,no car , no condo & no clubs membership ,,πŸ˜ƒπŸ˜ƒ

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    Replies
    1. Increase from Saving is pretty obvious so i did not even want to mention ! I think people who include them know. Bro, out of rat race .. many ways to Rome.

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    2. Hi Cory ,
      Yap! Many ways to Rome !, each one may find the methods suit them ...like black cat white cat speech from 邓小平。。

      Delete