Calculating performance % increase

bowlhead99

David_66 said:

Thanks Bowlhead and others

Yes I had presumed the tax relief might come in later but on the Aviva website it always shows the tax relief being added on the same day as the deposit.

I have tried downloading a ready made exel spreadsheet and slotting my numbers in which does give an annualised return of 13.8%, however the XIRR to date column gives some odd numbers such as 131% after the first payment in on the 14th February. See link to file https://drive.google.com/file/d/1l_srRzvFX-Y19n7IUSMmrYWXnRZUMksy/view?usp=sharing

Example spreadsheet downloaded from here https://www.vertex42.com/ExcelTemplates/investment-tracker.html

Without looking at the formulas in great detail the IRR figures seem about right.
You had an investment of 29088 on 4 Feb and basically turned it into 29713 in only ten days (30388 of value on 14 Feb including the 625 you added on 14 Feb, so 29713 is the value you'd have without that 625 contribution).

So, 675 of profit on 29088, that's 2.32% in just ten days. Annualise that for a rate of annual return.

Imagine if you had an investment that could continue to go up in value by 2.32% every ten days. After 360 days on £100 that's not just 2.32% X 36 for 84%, it's £100 X 1.0232 X 1.0232 X 1.0232... thirty six times which would turn £100 into about £230, or 130% return.

So, for the first ten days of your accounting year the investment was looking extremely lucrative. However, obviously that rate of return of a percent or two every week or two is not sustainable for a year straight, which is why there is not much point annualising returns obtained over very short timescales like that. However, by the end of the year it has evened out to something realistic*. 


* Not to say that your portfolio can realistically produce 13.8% year in year out, but that given the data, the final figure looks realistic for that rate of return. If it was a bank account paying almost 14% and you had that much at the start and added those £625s on those dates, that's what you would end up with in the bank at the end.**

**accepting the various inherent flaws of XIRR which is not a perfect solution especially for complex cash flow patterns but is a decent approximation of IRR for non-fixed periods in day-to-day scenarios

David_66

Thanks for that really clear explanation Bowlhead