Is this really how rate of return is calculated?

[msomnipotent]

I thought that we were doing pretty well with my daughter's 529 plan since it was showing our ROR was almost 9%. Then I noticed this: "1. Rate of Return (ROR) is based on the performance of your investments since account inception and the amount of your contributions and redemptions. Therefore, your ROR may differ from the performance of the investments themselves. ROR is not the standardized performance measure for the return of the underlying investments."


So instead of almost 9%, we are actually earning barely 4% once I remove our contributions for the year. I don't think it very accurate to include our contributions to the ROR. In fact, I think it is pretty deceptive, unless I'm wrong and that is the normal way of calculating ROR. Anyone know?

[disneysteve]

Rate of return shouldn't include your contributions.

That said, you do need to distinguish between the investment's rate of return and your personal rate of return. Those figures will differ because your personal return is dependent on when you made your contributions.

[rennigade]

I use a spreadsheet to keep track of the real returns. Just because an account was up 10% for the year doesnt mean jack. All depends when you put the money in...how much the fees are, blah blah.

[Gailete]

My mutual fund shows the ROR for the year, since we invested and our individual return over time. I don't know how a 529 would show though.

[kork13]

Rate of return shouldn't include your contributions.

That said, you do need to distinguish between the investment's rate of return and your personal rate of return. Those figures will differ because your personal return is dependent on when you made your contributions.

This is the key -- the underlying investments might have gone from a share price of $100/sh to $107/sh (earned 7%), but depending on when you bought those investments, you might outperform or underperform the underlying investment. If you bought low (say, at $95/sh), you could outperform the investment's average return (12.6% return). Likewise, if you bought high (at $103/sh), you might underperform (3.9% return)... and that is the case for each and every purchase lot of shares, because the value fluctuates over time (so you might have purchases at $95/sh, $98.5/sh, $99.7/sh, $103/sh, $105.3/sh, and $108.2/sh). So depending on your average purchase price per share, you could do better or worse than the underlying investment. To close out my example... if each of those purchases were for 1 share each, you'd end up with an average purchase price of $101.62/sh, and your average ROR would thus be roughly 5.3%. This example over-simplifies the situation, but hopefully it helps to demonstrate why there might (likely) be a difference.

[TexasHusker]

I thought that we were doing pretty well with my daughter's 529 plan since it was showing our ROR was almost 9%. Then I noticed this: "1. Rate of Return (ROR) is based on the performance of your investments since account inception and the amount of your contributions and redemptions. Therefore, your ROR may differ from the performance of the investments themselves. ROR is not the standardized performance measure for the return of the underlying investments."


So instead of almost 9%, we are actually earning barely 4% once I remove our contributions for the year. I don't think it very accurate to include our contributions to the ROR. In fact, I think it is pretty deceptive, unless I'm wrong and that is the normal way of calculating ROR. Anyone know?

Your mutual fund company is going to use whatever algorithm puts them in the most favorable light. Your results may vary. Use excel to keep track of the real return.

[msomnipotent]

I was just thinking about it this morning. It still chaps my pants that they can be this deceptive, so I sent an email to the state treasurer's office. I doubt they will do anything, though.