To me there is a flaw in Microsoft Money’s evaluation of portfolio
performance that can seriously mislead an unsavvy investor. The problem
shows up in the calculation of “Total Return” (TR 4-Week, TR YTD, etc…). The
problem shows up in the % shown on the Portfolio Manager. It shows up
erroneously in “Portfolio Review” when comparing performance vs. S&P500 or
other benchmarks. It also shows up in the % Rate of Return calculation in
the Reports section for Investment performance.

I’ll use an example. I have an old rollover IRA that began 2008 with
~$60,000 in assets. No money was transferred in or out of the IRA. As of
11/24/2008 the account had dwindled to ~$30,000. The calculation on this
should be relatively straight-forward. I’ve lost 50%. However, Money shows
a lost off 25%. How is this happening? It took me a bit to figure out what
Money is doing, but here goes…

Money is calculating this based on the following formula:

% Return = [(SAV+BUYS-SELLS-INC) – EAV] / (SAV + BUYS)

To make things correct, I believe the formula SHOULD be:

% Return = [{SAV+BUYS-SELLS-INCOME) – EAV] / (SAV+BUYS-SELLS-INC)

SAV = Starting Account Value
BUYS = Sum of all purchases made within the account during the time period
SELLS = Sum of value of all issues sold during the time period
INC = Sum of all income generated during period (dividends, etc…)
EAV = Ending Account Value

Why the problem? It has to do with re-allocating assets in a portfolio.
Using my example, let’s say on Jan 2nd I completely reallocated my IRA. I
sold $60,000 of assets and bought $60,000 of something else. Assuming 0
income, by their calculation:

% Return = [(60,000 + 60,000 – 60,000 – 0) – 30,000 / (60,000 + 60,000)
% Return = 25.0%

Using my formula, the correct value of 50.0% would have popped up. Again,
this is dangerous for an inexperienced investor who is getting a very
unrealistic estimate of the performance of his/her portfolio. Any fix in the
works? Not that I now of.


"Cal Learner-- MVP" wrote:

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In microsoft.public.money, neil154 wrote:

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So have you figured out how to calculate APR for the bank account?
:-)

Yes, I probably am more motivated than you and I have tried several samples
to try to figure out what the report is telling me but I am not still at a
loss.

Using the portfolio information only works for some speicif periods of time.
For example if I wanted to know my return for the perion from 7/1/07 to any
other time, the protfolio page will not give me the information.

I guess I am really curious what the "%Rate of Return" column is trying to
tell me if the other column is theequivalent to what the bank would calculate
if it were a savings account.

"Cal Learner-- MVP" wrote:

- quote -

In microsoft.public.money, neil154 wrote:

- quote -


In your effort to understand, have you entered some test cases to
improve your understanding? I thought about doing that, but I
realized that you are much more motivated in that area than I.

IRR puts a premium on when money is committed to, or is returned
from, the investment.

I suggest you use the Portfolio TR columns for the most useful gage
of performance.

I understand what you are telling me but of course I am still somewhat
confused. I think you are saying that "annual % Return" is the column that
accurately tells me the real rate of return (or the equivalent to what the
bank calls Annual Rate of Return. I don't understand the other column. It
sort of sounds like that is a "simpler" calculation of the same thing and why
would Money provide me with a simpler and less accurate number if they are
also supplying me with a more complex more correct number. In my case as I
mentioned there is such a drastic difference between the 2 numbers (in some
cases) that I think I am missing some understanding.

"Mark" wrote:

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The "Annual % Return" is the Total Annualized Return using IRR.
The %Rate of Return is using a simpler (basic) return calculation.

The reason the the Indexes would be the same versus your actual investments
is that the IRR is actually using your buys, sells, interest, dividends, etc
as part of the Cash Flow calculations, whereas the indexes simply have
beginnning and ending prices.

-Mark


"neil154" <neil154[at]discussions.microsoft.com> wrote in message
news:0C574E77-C3E4-41BE-8891-AAFFFF0503E6[at]microsoft.com...
- quote -

The reference refers to a column "Total Annualized Return" in the portfolio
view but The Money report (I use MoneyPlus H&B) does not not have a column
with this heading so I still do not understand what the 2 columns mean and
why they are different if I calculate for exactly 1 year.

"Mark" wrote:

- quote -

Annualized Return uses IRR:
http://support.microsoft.com/kb/131664/en-us


"neil154" <neil154[at]discussions.microsoft.com> wrote in message
news:F3B2502F-E89B-4C4A-BCF0-333DA0F0C933[at]microsoft.com...
- quote -

If i run a perfomance report there are 2 columns for judging performance -
"%Rate of Return" & "Annual % Return". I am having a problem understanding
the meaning of each column.

If I run the report for exactly 1 year then both columns show the exact same
numbers for indexes such as Dow Jones Indutrial Average or Nasdaq Composite
which I have in my watch list. In the same report for exactly 1 year the 2
columns have very different numbers for my stocks and mutual funds. For
example I have a mutual fund which shows 1.28 for % Rate of Return and 21.32
for Annual % Return.

I would appreciate it if someone could explain the differences between the 2
columns and which column is the equivalent to the annual percentage a bank
pays had I put the money in a bank account and gotten the return advertised
by the bank.

Thanks for your help.