Introducing myself

[Mark Carter]

> From: Charles Day cedayiv at gmail.com

> IRR is a really good way of measuring performance and one that I use all the

In a previous post, I hinted that there were some a possible objection to using IRR. IRR assumes that you are able to obtain that rate throughout the whole of the peoriod.

So if you bought some shares for $100 on 1 Jan, and sold them for $150 on 1 Jul, then the IRR is 125% (being 1.5 ^2 -1). It assumes that the $150 you sold your shares for can be invested at a rate of 50% per half-year.

However, I'm not too concerned with this objection - and to put a long story short, I feel it pretty much all comes out in the wash, anyway. Other methods have their problems, too. I always use IRR when working out performance - it's the one that makes the most sense, and I can compare the aggregated results against the index. I don't include dividends in my calculations, although one could argue that I should.

> 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.

I think one problem is "how do you define risk"? The way they do it in CAPM (Capital Asset Pricing Model) is to look at the volatility of the share price. I don't like that definition, though. For me, I guage my performance against an index (in my case, the Footsie), and figure that as long as I can consistently outperform it, then I'm doing well.


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