Apr 6 2014, 04:35 PM
QUOTE(edwardSL @ Apr 5 2014, 06:36 PM)
Hey guys,
Today I just started to use IRR method to evaluated my fund portfolio. Hope some of you may explain a bit to me ^^
1) Is IRR/XIRR only effective in calculating fund performance at least over one year period or longer? What's exactly the criteria to use IRR/XIRR?
2) What exactly the result of calculating IRR/XIRR will tell me? I just know number higher mean better? Lol
BTW Thx to @Pink Spider for the useful speadsheet provided ^^
quite hard to find simplified explanation on the net. this is extracted from reddit.Today I just started to use IRR method to evaluated my fund portfolio. Hope some of you may explain a bit to me ^^
1) Is IRR/XIRR only effective in calculating fund performance at least over one year period or longer? What's exactly the criteria to use IRR/XIRR?
2) What exactly the result of calculating IRR/XIRR will tell me? I just know number higher mean better? Lol
BTW Thx to @Pink Spider for the useful speadsheet provided ^^
QUOTE
tl,dr: IRR converts different payment returns overtime to a single value. It is helpful to compare investment options that have different lifespans. XIRR is computer shortcuts to make IRR analysis easier.
tl answer: IRR calculates the increase in future payments back to the value of today's money.
Let's say in example A, you loan me $100 today and I repay you $106 dollars next year. In example B, I take the same loan and repay you $53 in one year and $55 dollars the next year.
So scenario A, you end up with $106, scenario B $108. You like the $108, but in reality it has a lower return because it takes longer. Scenario A's IRR is 6%. Scenario B only increases your funds by 5.3% from year 0.
tl answer: IRR calculates the increase in future payments back to the value of today's money.
Let's say in example A, you loan me $100 today and I repay you $106 dollars next year. In example B, I take the same loan and repay you $53 in one year and $55 dollars the next year.
So scenario A, you end up with $106, scenario B $108. You like the $108, but in reality it has a lower return because it takes longer. Scenario A's IRR is 6%. Scenario B only increases your funds by 5.3% from year 0.
QUOTE
Although this is mostly correct, it is misleading to call it an "average return" and the internal rate of return can be quite different. I find it more helpful to think of IRR as the effective interest rate across all of my investments over a period of time.
sos
http://www.reddit.com/r/personalfinance/co...urn_irr_better/
http://www.reddit.com/r/explainlikeimfive/...urn_irr_better/
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