I always do this every year just to quickly see where I stand beside the benchmark, which in this case is the STI ETF.
XIRR is not an exhaustive measure for performance because it depends on many various factors, such as whether it includes cash. Mine did not include cash consideration otherwise it would have been a lot lower. A low XIRR in one particular year also does not mean that you are a lousy investor. Similarly, a high XIRR does not mean that you are a good investor.
We just need to be aware of the shortfall of the tools.
Many people have asked me on my previous post for the 31.8% growth year on year. To clarify, that includes capital injection and is simply a mathematical function of the overall portfolio growth. It does not measure the performance returns (though there are some correlation to it), which I will do so below shortly.
2016 XIRR Performance
My XIRR performance for 2016 returned 26.76% this year. The STI benchmark meanwhile returned 3.78% (measured as of 21st Dec). Both are inclusive of dividends.
If I were to focus on the performance, I’d take a look at the variance portion instead. To me, returning -20% when the STI is returning -40% in a particular year is a great achievement. I am not overly focused on individual returns but more focused towards what works and what doesn’t work for me.
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| Captured as of 21st Dec 2016* |
10 Key Takeaways
There a couple of key takeaway which I wanted to pen down for my future reminder. I think this is more important than anything else to make me become an even better investor.
1.) Kingsmen is still currently my biggest under-performance because there is no margin of safety when I bought them in 2015 (key takeaway for 2015). The loss has now narrowed down after receiving dividends to lower down the costs but they are still down 10% as of writing.
2.) The China scare in the beginning of the year was a fantastic opportunity to go aggressively long on the portfolio. If you look at the portfolio, it went down sharply in Jan and Feb but rebounded back strongly a couple of months thereafter. It was an opportunity to add position into some of the stronger companies.
3.) There were plenty of volatility this year – Brexit, Trump and Italy Referendum and opportunities are aplenty during such uncertainties. I simply love events like this because I can take advantage of it. Forecaster who predicted that the market will be shocked are left dumbfounded when the market continues to edge higher.
4.) Cash is such an important call option function. We need to have sufficient warchest when the big opportunity comes. Having more cash means more “bullets” to average down on strong companies when the market continues to discount them unfairly.
5.) Have a plan. Stick onto the kind of strategy you have envisioned from the start, always have a back-up plan and think of the worst case “what-if” scenarios should things backfire or doesn’t go to plan.
6.) Do not jump onto the crowded bandwagon. At the beginning there was Keppel, then M1 and then now Sabana. It is entirely ok not to participate in such bandwagon if we are not comfortable with it. If want to initiate a position, ensure that we always know the valuation of the company and wait for the crowd to subside down before entering. That’s usually when you get your maximum risk reward.
7.) Always be flexible in our strategy and approach. Do not be overly defensive on our own strategy no matter how much we believe in as we may be blinded by our own blind spot.
8.) Value investing is such a hotly sought after word that everyone wants to be associated with it. Value investing can come in many forms, depending on how you view it. Benjamin Graham and Warren Buffet style of value investing are not the only successful one out there.
9.) Always know your character and choose the style of investing that suits your character.
10.) Always be humble about our own performance, regardless of how we did in the year. There are always things that can be improved upon and things that we can pick up and learn from others. If we are not doing well, embrace criticism and feedback with acceptance and improve upon it.
Diary,
B
Good takeaway for those newer retail investors to think about.
Thanks Uncle CW.
Learnt a lot from you as well all these years. Please continue to share.
Hi B,
Wow ! Great portfolio returns of 18% average XIRR in 6 years ! I am sure it has outperformed many Fund Managers out there ,,,,👏🏽👏🏽👍👍
Cheers and hope u will have a good result in 2017 as well !✌️️✌️️
Hi STE
Many thanks 😉
I wouldn't say its totally comparable though as they had a stricter criteria with the computing.
My comparison is simply with myself from prior year so its easy to do it that way once i extract out the external factors 🙂
That's an amazing performance. Well done. I read your blog often and like the articles why you are buying or selling a counter. keep up the good work. There is lot to learn from you.
Hi Sureshkumar
Many thanks for your support and compliments. Glad it helps.
Hi B
That's a fantastic performance!
Particularly so in a tough environment this year. It beats even some very well respected funds that I track.
1 quick question though, since you are using XIRR, why don't you include the cash holdings portion? As you mentioned, excluding it may skew the results (both ways!) since cash holdings is a sizable portion of one's portfolio normally.
All hedge funds will have their performance measured taking into account the cash holdings logically, since theorectically… cash holdings (and the currency it is held in) is an asset class on it's own.
May we all have a fantastic 2017
Cheers
TTI
Hi TTTI
Thanks for leaving your comment.
You make absolutely good sense there and I am aware of such flaws by excluding the cash portion. It's really not an indicative of comparison against the funds managers out there because they have a much stricter criteria.
For me the reason why im excluding that out is to see my ability to put cash into an investment play regardless of timeframe. The comparison im trying to make here is also against myself of the previous year. I understand the flaws of such so i didnt really put much attention on the xirr until only once a year, like now.
But good point there and I'd love to see how you measure them for your own performance at the end of the year. Look forward always to your super good articles!!
Merry xmas to you and your family
Hi B
Yep, your way of tracking does allow you to compare against yourself on a y-o-y basis. (which is maybe the most important thing!)
I use XIRR like how a fund manager would use it. (When I first started, I had to verify from a friend who's a fund manager. Apparantly they get XIRR reports on a daily basis from their back end office, all pegged to their Bloomberg subscription)
So every dollar that's added or taken out of my fund is included on the XIRR chart, on the exact day the movement is recorded. So this means any cash, and that includes the effect of forex, is included as part of the portfolio, similar to the restrictions a fund manager managing the funds of others would have.
Which is why generally, fund managers are somewhat "pressured" to do something with the funds: they constantly form a part of their portfolio and weigh down on returns, and the managers obviously cannot tell their investors not to give them money first, wait till they want to deploy cash then hand them the money.
Having said all that, just a very cursory look tells me that even if you do include your cash holdings time weighted, you'd STILL beat some of the established funds out there with this kinda returns.
Definitely the STI ETF too.
Hi TTTi
Just to clarify on my point, i also computed the capital injection in and out into consideration, which is what the xirr is tracking. What i dont consider is the warchest and gold bar or blog income that i receive as part of the overall return.
The fund managers are measuring warchest as part of the overall returns so they have to keep thinking of ways to get fully invested. I think we can either use nav or roe to do that but not with xirr. Thats my understanding. I may be mistaken.
Hi B
Yup, this means you are still taking into consideration the time weightage in your calculation. Only difference is simply that the cash holding is excluded.
The fund managers also use XIRR actually, similar to what you have done, except that the cash has to be taken into consideration when calculating the returns. Which is why they have to deploy cash or it'd drag down their overall returns.
Unless it's held in a different currency from the reporting currency, in which case then it's considered forex, which as I have mentioned, is also considered an asset class on its own.
SGXcafe figures does not take into account your cash holdings, which is technically inaccurate too. They can't though, cos most people managing their portfolio don't behave like a hedge fund manager. They don't allocate capital to themselves and then worry about deploying the capital. They deploy capital as and when they find something. It's like a fund manager who can get capital only when he finds something he wants to buy.
So most people don't actually impute their "cash holdings" part into SGXcafe.
In any case, I think this is really not that significant. I suspect even if you do include, the figures probably won't be that dramatically different actually.
Nice discussion here, judging from the number of comments below.
Cheers
TTI
Hi TTTI
Thanks there.
I consulted a friend to compute including cash and it ranges between 15% to 20%, lower than the above obviously. Wah this is hard man hahaha i must learn of a way to compute like this 🙂
Congrats B! 😀
Excellent job!
Hi Unintelligent Nerd
Thank you!!! Youve done relatively well too this year!
This is good summary, thanks for sharing
Thank you PW 🙂
B,
First the compliment:
"I am not overly focused on individual returns but more focused towards what works and what doesn't work for me."
That's amply evident in your reflections. Good job.
Now comes the constructive feedback bit 😉
1) To the thinking readers, your previous post and this current will invite more questions than answers.
Only one reader has the smarts to verify with you. Your way of calculation is definitely not XIRR 😉 (Call it by another name – its your own invention; own it!)
2) A presentation should illuminate. And if it can lead to actionable decision – even better!
It's never good to invite more questions about HOW you derived your figures… It's a distraction to the message you are "selling".
Better to be crystal when making presentations to your steering group or top management. Trust is something we have to earn; don't lose it!
Hope this feedback will be enough to offset your kind lunch and drinks.
I'm no freeloader 😉
Hi SMOL
I think the lunch has soften the poke so it worked 😉
To be frank, my xirr is derived from sgxcafe which is the standard international way of computing the xirr. The fund managers there are using the nav method or the roe to include cash as part of their overall portfolio.
One secret, all it takes me is 1 min to extract out the information. If its wrong, appreciate someone can notify sgxcafe or investopedia because almost 10,00p subsribers now are using it. Oh boy, hope they are not looking at the wrong data.
B,
You have "consciously" left out gold (new revelation)and cash as part of your data input. The ownership lies with you 😉
With your comment to leave out cash from blogging??? I think all discussions come to a screeching halt… LOL!
P.S. XIRR is just an Excel function. Bet you never studied it in your MBA 😉
CARG and IRR are same same but different too.
Speak Singlish is OK; just as long we can revert back to proper English 😉
Wahahaha SMOL. Shucks did i just blurted out something??
So difficult aigoo next year i use pictures liao, no more words or worse numbers. Pictures paint a thousand words and more appreciated to be subjective by everybody 🙂
Hi B,
In my view, to calculate fund returns, measuring it at the net asset value per unit will be the best approach. It takes care of capital injection by issuing new units when cash are injected, based on the NAV/share during the point of injection. Meaning if your fund is $600 and there are 600 units. NAV per share is $1. An injection of $100, just issue 100 more units at $1. So total fund size is 600+100 = 700. Total units are 600+100 = 700. NAV per share = $700/700 = $1. Then you can accurately determine the fund returns including capital injections.
To be more critical, XIRR does not tell us how your fund perform over the benchmark. Annualised returns does. Furthermore, the published figures of ES3.SI is based on annualised returns, that are published semi-annually, whereas you are comparing with XIRR. Apples vs oranges?
Hi CS Lim
You are misunderstood.
My way of calculation is including the capital injection which is part of xirr. You misunderstood that with weighted time average which is not what im doing. What i meant when i said i did not include cash is i have 140k in my warchest now and i hv not assigned that as part of the bigger portfolio.
Like i said, its just for my info, i look at this like 2 min once per year then moves on. My goal is to have enough passive income to.sustain mt lifestyle. My goal is not to beat the benchmark nor to beat the fund managers out there. I really dont wish to spend anything more than 5 min per year tracking historical results. I am just a normal person here, not someone trying to win over something 🙂
Hi CS Lim
Apologies just re read your message and you are right. They are not apple to apple comparison but at least they are not apple to.baseball comparison hehe.
I got a friend to compute the way you asked above and indeed the return is albeit smaller (as expected) to around 18%. Oh well, i guess too troublesome for me. I think from now i will stop computing the returns and just go with the flow hahaha.
Thanks for your input nevertheless.
Classic story of The Man, his Son and The Donkey!
Just go with the flow. Show your passive income! $XX,XXX and then $XXX,XXX . Power!
Merry Christmas!
Hi B,
Tracking performance is a critical aspect of investment. It will determine if your strategic and tactical actions are better off than passive investment strategy (i.e just buying ETF). If 18% annualised return is true, its a good return vis-a-vis ES3.SI (btw annualised return for ES3 at the NAV level is 5.19% with dividends). Do note that Vanguard S&P 500 ETF's annualised return is about 18%, since the beginning of the year. There is another aspect about risk, but since it might not be so relevant here. It can be a discussion for another day. But I do have to commend that you are indeed a discipline saver. Most folks won't even come close.
@8888, if the passive income is S$400,000 but the unrealised profits are -$500,000. It will be better to put your money in fixed deposit. Passive income doesn't mean much in terms of fund performance.
My opinion only, form your own judgement.
Happy holidays to all.
Thanks CS Lim.
Very valid and good feedback from you and all. Thanks again and i will relook into the process 🙂
Happy holidays to you and family too 🙂
Investment is lifelong. Doesn't mean if your passive income is $20k and your portfolio loss is $25k this year means it would be better to put inside the bank. In the long run of 20years, your portfolio gain might be much higher without even taking into consideration of the passive income received during the 20 years.
There are few fellow bloggers have mentioned the inappropriate use of XIRR in your calculation, such as STTI, SMOL and CS Lim. I have done your way a couple of years back, and are now tracking my return use both XIRR and unitary price way mentioned by CS Lim. It allows me to cross check my return in both ways.
However the main point of calculation has to be cash(war chest) position inclusive, which some times is very sizeable; else the number could be misleading or self-deceiving.
Hi Bruce
I agree that my way of computing is not accurate but it measures differently and for different purpose.
My way of computing is to measure for portfolio returns, the ability of utilizing cash in equity to derive a certain equity return.
The ones which you and the rest are mentioning are measuring the overall portfolio return, rhe best optimal allocation of assets (including cash) and for this i agree that this is to be compared comparitevly against the sti index.
Its two separate thing altogether. No matter what the measurement is, there will always still be flaw in the computation because there will always be some thing which you might or might not included (e.g gold that you keep at home, rental or other income which you might derive, house that you have as your mortgage, etc).