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Conference nyoss1::market_investing

Title:Market Investing
Moderator:2155::michaud
Created:Thu Jan 23 1992
Last Modified:Thu Jun 05 1997
Last Successful Update:Fri Jun 06 1997
Number of topics:1060
Total number of notes:10477

166.0. "Don't know how to read performance data" by CGHUB::TANG () Wed Apr 22 1992 19:48

    I don't know how to read the performance reports issued by the mutual
    fund companies. For example, company A issued its 5 years performance
    reports as follows:
    
    1987	 20%
    1988	-10%
    1989	 30%
    1990	- 5%
    1991	 10%
     
    Question 1: What is company A's 5 years average annual total return?
    		Is it 9%?
    
    Question 2: If it is 9%. What does that mean? It means that the value
    		of each share has been increased 9% each of the past 5
    		years? If it is so, then a $100 investment at the beginning
    		of 1987 will be increased to $153.86 at the end of 1991
    		which will be different from the actual value which will 
    		be $146.72.
    
    This may be trivial for most of you, but to me who did not take
    Economics 101 in college, it is confusing.
    
    Thank you for your help.
    
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166.1ZENDIA::YANKESWed Apr 22 1992 20:0735
    
    	Re: .0
    
    	7.97%.  The only way I know how to do this is break out the
    calculator, pretend you're starting with $1000 and, in this case,
    multiply it by 1.2, .9, 1.3, .95 and then 1.1 to see how many dollars
    you'd end the five years with.  Then take that answer ($1,467.18 in
    this case) and use the financial buttons to figure the average annual
    return.
    
    	You asked if the return was 9%.  I presume you got that number by
    adding up all the returns (for a total of 45%) and divided it by the
    number of years to get 9%.  The problem with doing this is that a gain
    and a loss of equal percentages don't cancel each other out.  For
    example, start with $1,000 and think of a fund that goes down 50% one
    year and then up 50% the next year -- how much do you end up with?
    No, not $1,000 but rather $750.  The first year's loss knocked your
    balance down to $500 and the second year's gain was 50% of your initial
    balance for _that_ year, which means you gained $250 that year to bring
    you up to a total of $750.
    
    	Your second question of "what does it mean?" is an interesting one.
    No, it does not mean that each year the share values grew by 9%. 
    (7.97%, actually.)  What the average return rate is useful for is
    comparing this fund to others.  For example, if another comparable
    fund (ie. roughly the same investment goals) averaged 6% over this
    exact same period, you could surmise that the "7.97% fund" had better
    management than the other.  If, on the other hand, comparable funds
    went up an average of, say, 12% annually over this same time period,
    then perhaps this fund's managers are making decisions of less than
    average quality and you're better off with the money elsewhere.
    What the numbers absolutely do not mean, of course, is what this fund's
    return rate might be like in the future.
    
    							-craig