Losing patience with Large Caps

[jIM_Ohio]

I wouldn't mind posting my numbers but I am not sure I have record (I am sure I don't) of every contribution I have made over the last 11 years and when and what date it occurred.

You would need all of that, right?

I consider all my contributions for year as lump sum. This gives me an approximate IRR value. As the time between "current value" and date of deposit increase, the timing of the deposit means less.

The more volatile the fund, the more likely the timing of deposit has an impact.

[disneysteve]

I am not sure I have record (I am sure I don't) of every contribution I have made over the last 11 years and when and what date it occurred.

I think this is going to pose an accounting nightmare in the future when people start retiring and selling off fund shares that they've purchased and owned through dollar-cost-averaging and automatic investment plans over 2 or 3 or 4 decades. If you start buying shares monthly when you are 25, by the time you are 65, you will have made 480 separate purchases. Add in capital gains reinvestments and other distributions and you're probably looking at well over 500 transactions that will need to be reconciled to establish cost basis. And that's just for one fund. If you have done the same thing with multiple funds, there will be thousands of transactions to sort through. Plus, if you don't liquidate your entire account at one time, that will complicate things even more. I hope the fund companies are keeping good records because I'm sure many investors aren't.

[Like2Plan]

I consider all my contributions for year as lump sum. This gives me an approximate IRR value. As the time between "current value" and date of deposit increase, the timing of the deposit means less.

The more volatile the fund, the more likely the timing of deposit has an impact.

jIM_Ohio,
Didn't you post a link to a formula around the beginning of the year which compensated for dollar cost averaging? (I thought it was you). I think DisneySteve started the thread--the topic was something like how did your funds do last year...
I used the formula and the RoR came out exactly the same as was on my DH's annual statement. I remember thinking that was a nifty formula...

I put it in a excel spreadsheet- (I hope I have it translated correctly)

Annual RoR= ((ending fund value -1/2 your annual contributions) X ( beginning fund value + 1/2 your annual contributions) -1) X 100

[scfr]

LuxLiving - I am glad to know I am not the only one! When I first saw a financial calculator my eyes lit up and all I could think was "You mean they make THOSE ... wow." If we 2 aren't proof that not all women just lust after is shoes & handbags, I don't know what is!

Scanner - Yes, you would need records ... And you are going to need those records no matter what. Tax-deferred investments are just that ... DEFERRED ... and some day you are going to have to pay the piper (the tax man). My recommendation would be that you do what you can now to pull those records together, starting with your mutual fund company. And good luck ... Better late than never.

Thank God I read Jane Bryant Quinn (Making the Most of Your Money) before I made my first ever tax-deferred mutual fund purchase. She made it very clear that you had to keep track of every purchase, so I keep a list in my file for each investment. If I had not read her book, I may not have figured out until later that I needed to be doing that.

Disneysteve is absolutely right ... Some day there is going to be a big accounting nightmare!

[jIM_Ohio]

jIM_Ohio,
Didn't you post a link to a formula around the beginning of the year which compensated for dollar cost averaging? (I thought it was you). I think DisneySteve started the thread--the topic was something like how did your funds do last year...
I used the formula and the RoR came out exactly the same as was on my DH's annual statement. I remember thinking that was a nifty formula...

I put it in a excel spreadsheet- (I hope I have it translated correctly)

Annual RoR= ((ending fund value -1/2 your annual contributions) X ( beginning fund value + 1/2 your annual contributions) -1) X 100

YES- I posted that equation.

Use whichever technique you want. The first year or two you track IRR one formula or another will present you with varying returns (my IRR last year was between 5 and 11% depending on which formula I used).

As time passes, the formulas converge towards a common return, assuming you want a 3 year/5 year/10 year return calculated.

[noppenbd]

I'm not getting the accounting issue with tax-deferred accounts. As far as I understand it, withdrawals from traditional IRAs, 401ks, 403bs, etc, are all counted as ordinary income. There is no capital gains issue there, and cost basis is irrelevant. Qualified withdrawals from Roth IRAs are completely tax free so again there is no basis issue. I think the issue will really only come up for nondeductible contributions, and there the IRS just uses a pro-rated amount of nondeductible vs deductible, so the cost basis is irrelevant as well.

Of course for taxable accounts the basis issue is applicable.

[jIM_Ohio]

I'm not getting the accounting issue with tax-deferred accounts. As far as I understand it, withdrawals from traditional IRAs, 401ks, 403bs, etc, are all counted as ordinary income. There is no capital gains issue there, and cost basis is irrelevant. Qualified withdrawals from Roth IRAs are completely tax free so again there is no basis issue. I think the issue will really only come up for nondeductible contributions, and there the IRS just uses a pro-rated amount of nondeductible vs deductible, so the cost basis is irrelevant as well.

Of course for taxable accounts the basis issue is applicable.

You still want to track your IRR, even if tax deferred, to know how good or bad you are doing.

[noppenbd]

You still want to track your IRR, even if tax deferred, to know how good or bad you are doing.

I was referring to disneysteve's comments about when people retire and have been dollar-cost averaging for 40 years. When people are retiring and pulling money out of tax-sheltered accounts they generally do not need to worry about basis, correct?

For IRR, you definitely do need to consider how much you have contributed. But cost basis is different than contributions. Cost basis adds in all your dividends and capital gains distributions, whereas IRR would consider divs and CGs as gains rather than added basis.

[jIM_Ohio]

There are rules that you can cash out company stock from a 401k and pay only capital gains on the stock- so in that case basis is important.

Cost basis is also needed for IRR calculations.
IRR calculations can drive withdraw rates

and when drawing down assets. withdraw rates are king.

[Scanner]

Quote:
Originally Posted by Scanner
I am not sure I have record (I am sure I don't) of every contribution I have made over the last 11 years and when and what date it occurred.

I think this is going to pose an accounting nightmare in the future when people start retiring and selling off fund shares that they've purchased and owned through dollar-cost-averaging and automatic investment plans over 2 or 3 or 4 decades.

As another poster noted, I thought Roth IRA's when I take them out. . .are distributed tax-free.

So, if I have a $1,000,000 at age 65 and I want to buy a million dollar yacht, I can write a check.

[noppenbd]

Cost basis is also needed for IRR calculations.
IRR calculations can drive withdraw rates

and when drawing down assets. withdraw rates are king.

Cost basis should not be used for calculating IRR. Cost basis (at least the IRS definition) is the sum of original cost plus reinvested dividends and distribution. Many mutual funds distribute a lot of their performance as dividends and cap gains distributions. If you use basis to calculate your return you would be adding these distributions to your original cost, which would reduce your return, when in fact the distributions were part of your return.

The correct method is to use original purchase cost to calculate return and consider dividends and distributions as gains.

[disneysteve]

I was referring to disneysteve's comments about when people retire and have been dollar-cost averaging for 40 years.

I had taxable accounts in mind when I made that comment. I've got 3 taxable mutual fund accounts in addition to my retirement accounts. The oldest of those was opened in 1992 so I've already made 192 monthly deposits into that account alone, plus the reinvested fund distributions along the way, so over 200 separate purchases. And that's just on that one fund.

[jc3900]

if you have a high powered calculator or equivalent and have been investing for quite along time then here is the formula you could use to approximate your investment return.

A=Money deposited in year 1
B=Money deposited in year 2
C=Money Deposited in year 3
D=Money Deposited in year 4

A(1+i)^3.5 + B(1+i)^2.5 + C(1+i)^1.5 + D(1+i)^.5=Balance at Year 4 End

To figure out the exact return you would have to do:

Add the sum of D(1+i)^t where d is a deposit on the account and t is the time your deposit has been in the account. Subtract from that sum the balance on the account and then use a high powered calculator or equivalent to solve for i.

[Scanner]

You know. . .my intuition tells me my portfolio has returned about 8%. . .my problem is I guess when I invested years ago in international and large cap. . .I thought large cap would carry the load and international would act as a hedge.

Instead what has happened is my silver had a bull run in one year, and my international has carried the portfolio.

The Blue Chip/Large Cap has been the albatross on the portfolio.

I am trying to assess risk vs. reward.

A blue chip stock fund is always rated as moderate risk when you look at charts from mutual fund co.'s. . .so I would expect a moderate return (7-8%), not 4%.

I am not sure the risk has been commensurate with the reward even if my portfolio has worked out by chance.

I'll admit American Politics have played a role - when I see American Execs. and what they make regardless if they are a boner of a leader. . .it makes me want to dump the Micheal Dells, Steven Jobs, and other fat executives in America.

I'd be more pissed if I had what the pundits recommended - 60% of my portfolio in large caps.

[jIM_Ohio]

You know. . .my intuition tells me my portfolio has returned about 8%. . .my problem is I guess when I invested years ago in international and large cap. . .I thought large cap would carry the load and international would act as a hedge.

Instead what has happened is my silver had a bull run in one year, and my international has carried the portfolio.

The Blue Chip/Large Cap has been the albatross on the portfolio.

I am trying to assess risk vs. reward.

A blue chip stock fund is always rated as moderate risk when you look at charts from mutual fund co.'s. . .so I would expect a moderate return (7-8%), not 4%.

I am not sure the risk has been commensurate with the reward even if my portfolio has worked out by chance.

I'll admit American Politics have played a role - when I see American Execs. and what they make regardless if they are a boner of a leader. . .it makes me want to dump the Micheal Dells, Steven Jobs, and other fat executives in America.

I'd be more pissed if I had what the pundits recommended - 60% of my portfolio in large caps.

There is another probable factor to consider-

if investing is done in 6 stages
1) starting off
2) accumulation
3) growth
4) stability
5) withdraw start (financial independance)
6) draw down

then when anywhere in first 2, people will tend to be super critical of their choices. You know you have moved from accumulation to growth when
a) your yearly deposits are around 5-10% of the total, and decreasing every year as a percent of portfolio.
b) the gains of the portfolio are more than your deposits
c) you see that "low" returns of 4-8% are worth more to you than the deposits you put in.

I am still in accumulation myself, but can see my philiosphies (both in terms of risk tolerance, fund choice and measurement of performance) change as I have more money invested.