InsaneZane1

08-22-2014, 11:59 PM

userque posted a comment in another thread in this forum about different ways to calculate return rates. I believe he didn't seek out to stir up trouble, and that he only really meant to make others more aware that there are different ways to calculate rates. I'm going to use my 2013 month-to-month returns as an example:

Jan = 5.82% = 1.0582

Feb = 0.85% = 1.0085

Mar = 3.66% = 1.0366

Apr = 2.28% = 1.0228

May = 1.44% = 1.0440

Jun = (1.17%) = 0.9883

Jul = 5.89% = 1.0589

Aug = (2.13%) = 0.9787

Sept = 0.66% = 1.0066

Oct = 2.41% = 1.0241

Nov = 2.15% = 1.0215

Dec = 1.94% = 1.0194

Here are a few methods I know of to calculate EOY return rates:

Method 1: Simple addition

This is nothing more than finding the sum of all of the percentages above. I get 23.80%.

Method 2: Factor in Monthly Compounding

As userque suggested in the other thread, this is more complicated, but the simple explanation is to do the following:

1. Multiply all of the monthly returns together (e.g., 1.0582 x 1.0085 x 1.0366 x ......) = 1.2619

2. Subtract 1 from result achieved in step 1: 1.2619 - 1 = 0.2619

3. Multiply result of step 2 by 100: 0.2619 x 100 = 26.19%

You can also get info on how to do this from the TSP site at https://www.tsp.gov/PDF/formspubs/oc05-16w.pdf .

Method 3: Divide current balance (or balance at end of year in question) by sum of total contributions made and EOY balance of previous year

1. Obtain EOY balance from previous year by logging into TSP account and setting "Balance As Of..." date to the last day of December in the previous year. In my case, it would be the balance from 12/31/2012.

2. Obtain YTD/EOY total contributions for year that you are calculating for. In this case, I would use "Balance As Of..." 12/31/2013 and obtain total contributions made from the Contributions tab.

3. Divide EOY balance for 2013 by sum of numbers obtained in steps 1 and 2. --> EOY Bal / (P-EOY Bal + Cont)

4. Subtract 1 from result of step 3

5. Multiply result of step 4 by 100. Using this method I came up with 24.30% for my own account.

So, using the 3 different methods above, I came up with 3 completely different results:

1. Simple Addition = 23.80%

2. Compounded = 26.19%

3. EOY-(P-EOY+CONT) = 24.30%

I believe what userque was alluding to was that Method 2 is technically the more accurate way of calculating the return rate. Perhaps userque can chime in, however, and clarify whether this is indeed the case, or if a method I did not explain above is more "technically correct".

Jan = 5.82% = 1.0582

Feb = 0.85% = 1.0085

Mar = 3.66% = 1.0366

Apr = 2.28% = 1.0228

May = 1.44% = 1.0440

Jun = (1.17%) = 0.9883

Jul = 5.89% = 1.0589

Aug = (2.13%) = 0.9787

Sept = 0.66% = 1.0066

Oct = 2.41% = 1.0241

Nov = 2.15% = 1.0215

Dec = 1.94% = 1.0194

Here are a few methods I know of to calculate EOY return rates:

Method 1: Simple addition

This is nothing more than finding the sum of all of the percentages above. I get 23.80%.

Method 2: Factor in Monthly Compounding

As userque suggested in the other thread, this is more complicated, but the simple explanation is to do the following:

1. Multiply all of the monthly returns together (e.g., 1.0582 x 1.0085 x 1.0366 x ......) = 1.2619

2. Subtract 1 from result achieved in step 1: 1.2619 - 1 = 0.2619

3. Multiply result of step 2 by 100: 0.2619 x 100 = 26.19%

You can also get info on how to do this from the TSP site at https://www.tsp.gov/PDF/formspubs/oc05-16w.pdf .

Method 3: Divide current balance (or balance at end of year in question) by sum of total contributions made and EOY balance of previous year

1. Obtain EOY balance from previous year by logging into TSP account and setting "Balance As Of..." date to the last day of December in the previous year. In my case, it would be the balance from 12/31/2012.

2. Obtain YTD/EOY total contributions for year that you are calculating for. In this case, I would use "Balance As Of..." 12/31/2013 and obtain total contributions made from the Contributions tab.

3. Divide EOY balance for 2013 by sum of numbers obtained in steps 1 and 2. --> EOY Bal / (P-EOY Bal + Cont)

4. Subtract 1 from result of step 3

5. Multiply result of step 4 by 100. Using this method I came up with 24.30% for my own account.

So, using the 3 different methods above, I came up with 3 completely different results:

1. Simple Addition = 23.80%

2. Compounded = 26.19%

3. EOY-(P-EOY+CONT) = 24.30%

I believe what userque was alluding to was that Method 2 is technically the more accurate way of calculating the return rate. Perhaps userque can chime in, however, and clarify whether this is indeed the case, or if a method I did not explain above is more "technically correct".