Everybody knows 2008 was a bad year for investing. It may seem odd to some people that I never bothered to calculate my rate of return during the year. That information just isn’t so useful to me. I have no control over what the market does. Most of my investments are already in index funds so I don’t have to see how I did relative to the market. I know it’s going to match the market. I also don’t second-guess my portfolio allocation just because the market didn’t do well. For the purpose of documenting my progress, I do a rough calculation once a year. I don’t use a fancy spreadsheet although I know how to use XIRR in Excel. I wrote about this simple formula two years ago.
rate of return = (ending balance – 0.5 * net in) / (beginning balance + 0.5 * net in) – 1
A variation of the same formula is:
rate of return = (ending balance – beginning balance – net in) / (beginning balance + 0.5 * net in)
“Net in” is the total amount you put into a set of accounts you identified as your investment pool, minus the total amount you took out of those accounts. 401k match from your employer also counts as “in.”
My personal rate of return for 2008 is -21%. Despite the negative rate of return, my ending balance still managed to come out higher than my beginning balance, because of my “net in.” I think too many people worry about what the markets will do. If they are not retired, they should really focus on the “net in.” That’s how you grow your investments. If you are able to grow your investments in one of the worst years in history, think what will happen when it’s not so bad.