Tuesday, July 20, 2010
If an investment (i.e. mutual fund) starts off with $20,000 and is worth $22,000 at the end of the year, then you know that you earned a 10% return.
But, what if, during the course of the year, you invested an additional $100 per month during the year (for a total of $1200)?
You can't determine your return by dividing 22,000 by 21,200 because you did not have $21,200 invested since the beginning of the year.
You need to use regression analysis to calculate the exact return but, here is a quick and dirty way to calculate the approximate return:
Adj. starting value = original starting value + amount added / 2
Adj. ending value = original ending value - amount added / 2
Approx. rate of return = Adj. ending value / Adj. starting value
So, in this case, the original starting and ending values are $20,000 and $22,000. During this time period, we added an additional $1200.
So, the approximate internal rate of return = (22000-600) / (20000+600) = 3.89%
Labels: Personal Finance