Incorrect. This estimation only works for short periods. For example:
For lump sum investment at 5% pa, the ROI after 5 years is 28% and the ROI after 8 years is 48%.
For lump sum investment at 10% pa, the ROI after 5 years is 61% and the ROI after 8 years is 114%.

Before I start, old post from 2015: https://forum.lowyat.net/index.php?showtopi...post&p=76580122

Return per year over total time invested is more like CAGR/Annualized return. IRR takes into account the duration of your investments. For example RM 1000 becoming RM 2000 in 1 year has an IRR of 100%, and in 2 years has an IRR of 41.42%.

With regular/irregular top-ups, estimating your actual IRR/ROI through simple calcuation simply will not work. Notice below that although the fund house (or bank or other investment) claims 5% PA, your regular investment over the 4 years only generated you just 3.13% in annualized returns. Annualized returns assume that all your investment top ups over the 4 years happen right at the beginning as a lump sum.

Annualized return is: ((Portfolio value/Total invested)^(1/Years invested))-1. So ((18102.53/16000)^(1/4))-1 = 3.1347%.

Do this in reverse to see how much your RM 16000 becomes in 4 years at 3.1347% PA: RM 16000*1.031347^4 = RM 18102.53.

[ See post #1 for a more graphical look at this ]

Why is it so much lower than 5%?? Because your later investments have less time to grow and compound (compare vs lump sum).

Notice that the IRR for regular investments is higher than the IRR for lump sum but the ROI for regular investments is lower than lump sum. It is the answer to the question of "Considering all the money you're investing in over time and the money that you will get back, if you adjust the value of each to reflect today's value (Present Value), what is the rate it is growing at that makes the total (Net Present Value) become zero?

This table is not meant to be read as a suggestion that lump sum is better. DCA/VCA (Cost Averaging) is used to reduce risk.



This post has been edited by idyllrain: Jan 29 2017, 09:14 PM

You can't really do that too even for simple straightforward investments.

Let's use a example, you invested RM 10000 in Fund A, the first year it went up 10%, the second year it went down 20%, the goes up 10% Does it cancel out?

Here's the calculation:

Start -> RM 10000
After 1 year -> RM 10000 * (1 + 0.1) = RM 11000
After 2 years -> RM 11000 * (1 - 0.2) = RM 8800
After 3 years -> RM 8800 * (1 + 0.1) = RM 9680
ROI -> (9680/10000) - 1 = -3.2%

Here's 4 years with the first year +10%, second year +10%, third year +10%, fourth year recession -30%:

S -> RM 10000
1 -> RM 10000 * 1.1 = RM 11000
2 -> RM 11000 * 1.1 = RM 12100
3 -> RM 12100 * 1.1 = RM 13310
4 -> RM 13310 * 0.7 = RM 9317
R -> (9317/10000) - 1 = -6.8%

I'm not a sifu la, just a fellow investor.

Those examples were fixed rates though. The thing with 3/5-year annualized returns is that it shows the "average" annual return over the past 3/5 years, so if there's an excellent year in there, it'll pull up the values. You could lump sum into a bad year and get very bad returns in the first year and have to wait 3 years to see your investment's annualized return match the published numbers.

Here's a more detailed look at IRR, how it is calculated and the implications of it:


Edit: Note that IRR is often used to evaluate different investments but it has some drawbacks.

This post has been edited by idyllrain: Jan 29 2017, 11:01 PM

Firstly, they are not the exact same investment purely because the approach is different.
Secondly, define "beat"? If you're talking final ROI, yes, lump sum is better. If you're talking which one is the better investment, then periodic is better. Which do you care about more?

Note that ROI, IRR, CAGR values are all general metrics that tell you the return of your investment in different ways. (https://forum.lowyat.net/index.php?showtopic=3730638&view=findpost&p=76895955)

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By definition the IRR is the rate at which the sum of the Present Value of your investment's inputs and outputs equal to zero, i.e. Net Present Value = 0. So, if you adjust everything to right now (Present Value), how much do I have to adjust so that my top-ups PLUS my final return so that adding them up will become zero? That "how much" is the IRR.

What is the Present Value? To understand this concept, you first have to realize that RM 1000 in your hands right now is more valuable than RM 1000 4 years later. This is called the Time Value of Money. This is the reason why interest rates exist. If I have RM 1000 now, I can put it to use now rather than later (i.e. it has the potential to generate interest). When calculating current investment value and past top-ups, "present" is shifted to the beginning of the investment (initial investment).

Why total to zero? Because you want to find the rate where the breakeven point happens. Negative means you need to lose money to reach breakeven, and positive means you'll gain money to reach breakeven.

So how do you find the IRR? You can use approximations (or graphical methods) to find an acceptable number. A simple way to think about this is to first try the number 10%, and then trying 9% and 11% to see which one gets you closer to zero, and just keep trying till you get a fairly accurate zero. In Excel, the calculation stops at 0.000001 percent accuracy.

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Back to the example I gave:
The IRR of the periodic investment is 5.87% and the ROI is 13.14%.
The IRR of the lump sum investment is 5% and the ROI is 21.55%.

Why is the periodic investment IRR higher but ROI lower? Because when trying out different rates to try and get breakeven, we find that IF we adjust all the money we invest AND the final value to the day we first started investing, a RATE of 5.87% per year will give us RM 18102.53.

So at 5.87% a year and you got RM 18102.53 in 4 years, how much would the investment have cost if you do lump sum instead of periodic? Easy: RM 18102.53/(1.0587^4) = RM 14409.98.

Is this a better investment? Sure, because although you spent RM 16000 over the 4 years, you did not have to cough up RM 16000 one shot lump sum right at the beginning! Remember money later on is worth less than it was before. Your RM 16000 over the 4 years at 5% PA (given your investment pattern) is the equivalent of a lump sum RM 14409.98 4 years ago at 5.87% PA. This also means that considering time value of money, the ROI is higher.

From another POV, you can say that IRR is used to tell you what returns different investments generate/generated when compared against a standard. You need to standardize before you can do meaningful comparisons.

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IRR has some drawbacks and is not usually used alone. In this example, the two investments have the same duration of 4 years with the same annual return so you can use IRR to compare the two strategies. Also note that the "I" refers to "Internal", i.e. not taking into account external factors (risk, etc).

Again: ROI, IRR, CAGR tell you different aspects about the return of your investment. As an investor, you have to know what you want and use these numbers to tell you if the investment is suitable for you.

It is not about winning the final number, it is finding the better/more suitable investment (i.e. the combination of returns and commitment). You use the IRR to answer questions like the ones below:

A) Do you want to have 4866.60 in 4 years?
> You just need 3399.52 now to invest in a fund at 9.38% PA
> or, You just need 3577.10 now to invest in a fund at 8.00% PA
> or, Don't have that money? Then invest 4000 at 1000 per year in a fund at 8.00% PA
> or, Don't have that money? Then invest 4000 at 250 per quarter in a fund at 8.00% PA

B) You have 4000 now and want to invest it for 4 years in either Fund A/B/C all at 8.00 PA. Which one should you pick?
> Fund A is only lump sum 4000, you'll get 36.05% ROI
> or, Fund B requires annual top-ups, you can put 1000 per year to get 21.66% ROI
> or, Fund C requires quarterly top ups, you can put 250 per quarter to get 21.66% ROI

Using these calculations, you can find which one among the options above is better for you. A key concept underlying IRR is the Time Value of Money; unless you understand it, the IRR will appear unintuitive.



Obviously all these calculations assume yearly compounding. In unit trusts, the returns happen by capital appreciation on much smaller time frames so the Time Value of Money is of bigger significance.

This post has been edited by idyllrain: Jan 30 2017, 04:48 PM

The macro uses Windows-specific functionality to download the contents on FSM's page; that's why it will give you an ActiveX error. I can rewrite it to work for Mac OS X but I will have to get access to a Mac for testing. Additionally, the Mac code will not run on Windows.

skynode, hong823

Here. Coded and tested on Office for Mac 2011 MacOS Sierra.
[attachmentid=8460169]
This version below should run on Office for Mac 2016, but I've not tested it
[attachmentid=8460188]
Caveats: Like the Windows version, the moment FSM changes the structure or URL of the NAV page, this code will break. This is unavoidable since FSM does not provide an interface to get NAV data. I'm also assuming that the "curl" and "perl" commands are available on your Mac at the standard locations (You can test it by open the Terminal app and typing "perl --version" and "curl --version"; you should see some information about the version numbers printed out).

Details below if you'd like to know what is actually being run.



This post has been edited by idyllrain: Feb 5 2017, 09:30 PM

TS is AIYH, so only he can edit the OP.

This post has been edited by idyllrain: Feb 7 2017, 09:02 AM