Comments on: Modified Dietz Return Calculations http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/ A personal finance blog written by Preet Banerjee Wed, 23 May 2012 17:49:11 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: Alan http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-11656 Alan Thu, 29 Dec 2011 21:42:15 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-11656 In modified Dietz, how to you handle net cash withdrawls on the denominator..For example, if I start with 50,000 and over a 10 year period, 150,000 was depositied but 350,000 was withdrawn and the ending value of investments is 700,000. Net cash outflow = -200,000 Weighted cash = -125,000 Thank you In modified Dietz, how to you handle net cash withdrawls on the denominator..For example, if I start with 50,000 and over a 10 year period, 150,000 was depositied but 350,000 was withdrawn and the ending value of investments is 700,000. Net cash outflow = -200,000 Weighted cash = -125,000

Thank you

]]> By: Tiger Woods LinkStuff For Dec 10 http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4665 Tiger Woods LinkStuff For Dec 10 Wed, 16 Dec 2009 04:51:17 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4665 [...] Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio [...] [...] Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio [...]

]]> By: Patrick http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4664 Patrick Fri, 11 Dec 2009 21:18:52 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4664 Thanks Michael. Some interesting points to consider. Thanks Michael. Some interesting points to consider.

]]> By: Michael James http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4663 Michael James Fri, 11 Dec 2009 16:55:42 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4663 Patrick: It's true that IRR is not always well-defined. However, all methods of calculating return have their warts. For example, Suppose that we invest $10,000 initially, it grows to $12,000 by then end of the first year, and we withdraw $11,000. Then the remaining $1000 doubles to $2000 by the end of the 12th year. By any reasonable measure, this is a good, but not spectacular return. However, the Modified Dietz says that the total return over the 12 years is -3600%! The IRR is a more reasonable 14.5% per year. Most of the time, when calculating just a one-year return on a portfolio with only small cash flows relative to the portfolio size, just about any method will give reasonable answers. However, there will always be situations where IRR and IRR estimates like Modified Dietz will fail. Methods involving expected utility and presumed reinvestment rates of cash flows have their problems as well. While they tend to give more stable answers in the more extreme cases, they require that we build in assumptions about utility or expected returns on cash flows. In the end, the best measure will depend on the individual and what they plan to use the calculated return for. Patrick:

It’s true that IRR is not always well-defined. However, all methods of calculating return have their warts. For example, Suppose that we invest $10,000 initially, it grows to $12,000 by then end of the first year, and we withdraw $11,000. Then the remaining $1000 doubles to $2000 by the end of the 12th year. By any reasonable measure, this is a good, but not spectacular return. However, the Modified Dietz says that the total return over the 12 years is -3600%! The IRR is a more reasonable 14.5% per year.

Most of the time, when calculating just a one-year return on a portfolio with only small cash flows relative to the portfolio size, just about any method will give reasonable answers. However, there will always be situations where IRR and IRR estimates like Modified Dietz will fail.

Methods involving expected utility and presumed reinvestment rates of cash flows have their problems as well. While they tend to give more stable answers in the more extreme cases, they require that we build in assumptions about utility or expected returns on cash flows. In the end, the best measure will depend on the individual and what they plan to use the calculated return for.

]]> By: Tiger Woods LinkStuff For Dec 10 « Daily News http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4662 Tiger Woods LinkStuff For Dec 10 « Daily News Fri, 11 Dec 2009 13:32:32 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4662 [...] Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio [...] [...] Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio [...]

]]> By: Patrick http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4661 Patrick Fri, 11 Dec 2009 06:34:29 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4661 Michael - the IRR is not well-defined if there is a mixture of positive and negative cash flows, and is generally not a good way to compare investments because doing so would give results at odds with expected utility. Michael – the IRR is not well-defined if there is a mixture of positive and negative cash flows, and is generally not a good way to compare investments because doing so would give results at odds with expected utility.

]]> By: Melissa http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4660 Melissa Thu, 10 Dec 2009 16:38:50 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4660 Thank you Preet, this has been very informative. I especially like the "Can you just tell me ...." section. Also .... Michael James, thanks for the additional comments. Thank you Preet, this has been very informative. I especially like the “Can you just tell me ….” section.

Also …. Michael James, thanks for the additional comments.

]]> By: Michael James http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4659 Michael James Thu, 10 Dec 2009 04:52:28 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4659 The Modified Dietz method of calculating portfolio return is a reasonably good approximation of the internal rate of return (IRR) in most cases. The IRR is a dollar-weighted measure that is simply the rate of return that causes the net present value of all cash flows to be zero. When the portfolio starting value and ending value are large compared to other cash flows in-between, just about all methods of calculating return give close to the same result. In Preet's example where the added $100,000 is very large compared to the portfolio starting value, the time-weighted return fails miserably, but the Modified Dietz gives a reasonable answer of just a hair over zero percent return. The Modified Dietz is a much better approximation to the IRR than time-weighted measures. Saving computing power isn't much of an excuse any more for using approximations. It's not that much harder to find the IRR than it is to use Modified Dietz, and who cares if a computer is doing the work? The exception would be if you run an investment company and your software already does Modified Dietz, the last thing you want to have to do is change it. In the vast majority of cases, the IRR and Modified Dietz return are going to be so close that it doesn't really matter. The Modified Dietz method of calculating portfolio return is a reasonably good approximation of the internal rate of return (IRR) in most cases. The IRR is a dollar-weighted measure that is simply the rate of return that causes the net present value of all cash flows to be zero.

When the portfolio starting value and ending value are large compared to other cash flows in-between, just about all methods of calculating return give close to the same result. In Preet’s example where the added $100,000 is very large compared to the portfolio starting value, the time-weighted return fails miserably, but the Modified Dietz gives a reasonable answer of just a hair over zero percent return. The Modified Dietz is a much better approximation to the IRR than time-weighted measures.

Saving computing power isn’t much of an excuse any more for using approximations. It’s not that much harder to find the IRR than it is to use Modified Dietz, and who cares if a computer is doing the work? The exception would be if you run an investment company and your software already does Modified Dietz, the last thing you want to have to do is change it.

In the vast majority of cases, the IRR and Modified Dietz return are going to be so close that it doesn’t really matter.

]]> By: Doctor Stock http://wheredoesallmymoneygo.com/modified-dietz-return-calculations/#comment-4658 Doctor Stock Thu, 10 Dec 2009 03:10:18 +0000 http://www.wheredoesallmymoneygo.com/?p=1495#comment-4658 Nice article - a simple post for the average reader. Nice article – a simple post for the average reader.

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