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e.g. Guide to Financial Planning

The mathematics of investing is a handy reference for those who want to calculate their own investment metrics such as yield and annual return. However, I must state … with important caveats.

I would caution that calculating your own returns is fraught with miscalculations and misinterpretations!

For example this article “Understanding the Link Between Volatility and Compound Returns” demonstrates the complexity of trying to do this on your own without complete understanding of how important your data source and calculations are.

‘Variance Drain’ or “Volatility Drag”  operates under the theory that between two portfolios with the same beginning and same average return, the one with the greater variance will have a lower compound return and less-ending wealth.”

Moral of the story … unless you have a reputable outside source to calculate your returns that also consider the amount of, and timing of, both withdrawals and contributions, in addition to the market effect, combined with considerations for the volatility of ALL the markets within your portfolio, your calculations of your returns are suspect.

In other words … this is not as easy as you may think. For example, the Modified Dietz Method may be more appropriate to individual portfolios which are what most people are trying to measure, as opposed to what their mutual fund is doing (which can be obtained through publicly published reports – and tend to have little to do with the cash flows individuals have done into, and out of, the same mutual fund). In other, other words, what the fund’s returns are, may not be your returns, if you’re adding or subtracting money.


Photo by Jeffrey Betts on StockSnap.

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