Introducing myself

Charles Day cedayiv at gmail.com
Thu Jan 3 18:45:35 EST 2008


On Jan 3, 2008 2:46 PM, Andrew Sackville-West <andrew at swclan.homelinux.org>
wrote:

> On Thu, Jan 03, 2008 at 10:02:47PM +0000, mark carter wrote:
> >
> > As an aside, the way I calculated return was as an IRR (i.e. taking
> > cashflows, and using current share price as a sales value for any shares
> > that remain). I didn't make a distinction between realised and
> > unrealised gain. However, it was a statistic that was quite useful to me
> > - because it represented a "true" compound rate of return (although
> > there are some philosophical objections to it), and I could guage how I
> > was doing against a market index.
>
> IRR has been brought up a couple of times and I think there is some
> demand for it. I don't really understand it, but I think it includes
> some evaluation of risk, which may really be a problem. But I don't
> know enough to speak to that, really.
>

IRR is a really good way of measuring performance and one that I use all the
time... GnuCash needs this for sure. You can think of the IRR as the annual
interest rate that a bank would have to pay you to match the performance of
your investment, taking into account the cash flows. There is no risk factor
involved in making the calculation. The only place risk comes in is that the
reader must have enough common sense to realize that the reported IRR is not
risk-adjusted. Your IRR may be 20%, which is nominally better than the 5%
interest that your local bank pays, but whether or not your investment was
genuinely better than a bank account depends on how much riskier that
investment was.

-Charles


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