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Simon Michael 2020-11-19 09:19:12 -08:00
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hledger/Hledger/Cli/Commands/Roi.txt
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@ -17,10 +17,234 @@ At a minimum, you need to supply a query (which could be just an account
name) to select your investments with --inv, and another query to
identify your profit and loss transactions with --pnl.
It will compute and display the internalized rate of return (IRR) and
time-weighted rate of return (TWR) for your investments for the time
period requested. Both rates of return are annualized before display,
regardless of the length of reporting interval.
This command will compute and display the internalized rate of return
(IRR) and time-weighted rate of return (TWR) for your investments for
the time period requested. Both rates of return are annualized before
display, regardless of the length of reporting interval.
An example:
https://github.com/simonmichael/hledger/blob/master/examples/roi-unrealised.ledger
Note, in some cases this report can fail, for these reasons:
- Error (NotBracketed): No solution for Internal Rate of Return (IRR).
Possible causes: IRR is huge (>1000000%), balance of investment
becomes negative at some point in time.
- Error (SearchFailed): Failed to find solution for Internal Rate of
Return (IRR). Either search does not converge to a solution, or
converges too slowly.
Examples:
- Using roi to report unrealised gains:
https://github.com/simonmichael/hledger/blob/master/examples/roi-unrealised.ledger
More background:
"ROI" stands for "return on investment". Traditionally this was computed
as a difference between current value of investment and its initial
value, expressed in percentage of the initial value.
However, this approach is only practical in simple cases, where
investments receives no in-flows or out-flows of money, and where rate
of growth is fixed over time. For more complex scenarios you need
different ways to compute rate of return, and this command implements
two of them: IRR and TWR.
Internal rate of return, or "IRR" (also called "money-weighted rate of
return") takes into account effects of in-flows and out-flows. Naively,
if you are withdrawing from your investment, your future gains would be
smaller (in absolute numbers), and will be a smaller percentage of your
initial investment, and if you are adding to your investment, you will
receive bigger absolute gains (but probably at the same rate of return).
IRR is a way to compute rate of return for each period between in-flow
or out-flow of money, and then combine them in a way that gives you an
annual rate of return that investment is expected to generate.
As mentioned before, in-flows and out-flows would be any cash that you
personally put in or withdraw, and for the "roi" command, these are
transactions that involve account(s) matching --inv argument and NOT
involve account(s) matching --pnl argument.
Presumably, you will also record changes in the value of your
investment, and balance them against "profit and loss" (or "unrealized
gains") account. Note that in order for IRR to compute the precise
effect of your in-flows and out-flows on the rate of return, you will
need to record the value of your investement on or close to the days
when in- or out-flows occur.
Implementation of IRR in hledger should match the XIRR formula in Excel.
Second way to compute rate of return that roi command implements is
called "time-weighted rate of return" or "TWR". Like IRR, it will also
break the history of your investment into periods between in-flows and
out-flows to compute rate of return per each period and then a compound
rate of return. However, internal workings of TWR are quite different.
In technical terms, IRR uses the same approach as computation of net
present value, and tries to find a discount rate that makes net present
value of all the cash flows of your investment to add up to zero. This
could be hard to wrap your head around, especially if you haven't done
discounted cash flow analysis before.
TWR represents your investment as an imaginary "unit fund" where
in-flows/ out-flows lead to buying or selling "units" of your investment
and changes in its value change the value of "investment unit". Change
in "unit price" over the reporting period gives you rate of return of
your investment.
References: * Explanation of rate of return * Explanation of IRR *
Explanation of TWR * Examples of computing IRR and TWR and discussion of
the limitations of both metrics
More examples:
Lets say that we found an investment in Snake Oil that is proising to
give us 10% annually:
2019-01-01 Investing in Snake Oil
assets:cash -$100
investment:snake oil
2019-12-24 Recording the growth of Snake Oil
investment:snake oil = $110
equity:unrealized gains
For now, basic computation of the rate of return, as well as IRR and
TWR, gives us the expected 10%:
$ hledger roi -Y --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+-----++--------+--------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+=====++========+========+
| 1 || 2019-01-01 | 2019-12-31 || 0 | 100 | 110 | 10 || 10.00% | 10.00% |
+---++------------+------------++---------------+----------+-------------+-----++--------+--------+
However, lets say that shorty after investing in the Snake Oil we
started to have second thoughs, so we prompty withdrew $90, leaving only
$10 in. Before Christmas, though, we started to get the "fear of mission
out", so we put the $90 back in. So for most of the year, our investment
was just $10 dollars, and it gave us just $1 in growth:
2019-01-01 Investing in Snake Oil
assets:cash -$100
investment:snake oil
2019-01-02 Buyers remorse
assets:cash $90
investment:snake oil
2019-12-30 Fear of missing out
assets:cash -$90
investment:snake oil
2019-12-31 Recording the growth of Snake Oil
investment:snake oil = $101
equity:unrealized gains
Now IRR and TWR are drastically different:
$ hledger roi -Y --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+-----++-------+-------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+=====++=======+=======+
| 1 || 2019-01-01 | 2019-12-31 || 0 | 100 | 101 | 1 || 9.32% | 1.00% |
+---++------------+------------++---------------+----------+-------------+-----++-------+-------+
Here, IRR tells us that we made close to 10% on the $10 dollars that we
had in the account most of the time. And TWR is ... just 1%? Why?
Based on the transactions in our journal, TWR "think" that we are buying
back $90 worst of Snake Oil at the same price that it had at the
beginning of they year, and then after that our $100 investment gets $1
increase in value, or 1% of $100. Let's take a closer look at what is
happening here by asking for quarterly reports instead of annual:
$ hledger roi -Q --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+-----++--------+-------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+=====++========+=======+
| 1 || 2019-01-01 | 2019-03-31 || 0 | 10 | 10 | 0 || 0.00% | 0.00% |
| 2 || 2019-04-01 | 2019-06-30 || 10 | 0 | 10 | 0 || 0.00% | 0.00% |
| 3 || 2019-07-01 | 2019-09-30 || 10 | 0 | 10 | 0 || 0.00% | 0.00% |
| 4 || 2019-10-01 | 2019-12-31 || 10 | 90 | 101 | 1 || 37.80% | 4.03% |
+---++------------+------------++---------------+----------+-------------+-----++--------+-------+
Now both IRR and TWR are thrown off by the fact that all of the growth
for our investment happens in Q4 2019. This happes because IRR
computation is still yielding 9.32% and TWR is still 1%, but this time
these are rates for three month period instead of twelve, so in order to
get an annual rate they should be multiplied by four!
Let's try to keep a better record of how Snake Oil grew in value:
2019-01-01 Investing in Snake Oil
assets:cash -$100
investment:snake oil
2019-01-02 Buyers remorse
assets:cash $90
investment:snake oil
2019-02-28 Recording the growth of Snake Oil
investment:snake oil
equity:unrealized gains -$0.25
2019-06-30 Recording the growth of Snake Oil
investment:snake oil
equity:unrealized gains -$0.25
2019-09-30 Recording the growth of Snake Oil
investment:snake oil
equity:unrealized gains -$0.25
2019-12-30 Fear of missing out
assets:cash -$90
investment:snake oil
2019-12-31 Recording the growth of Snake Oil
investment:snake oil
equity:unrealized gains -$0.25
Would our quartery report look better now? Almost:
$ hledger roi -Q --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+------++--------+--------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+======++========+========+
| 1 || 2019-01-01 | 2019-03-31 || 0 | 10 | 10.25 | 0.25 || 9.53% | 10.53% |
| 2 || 2019-04-01 | 2019-06-30 || 10.25 | 0 | 10.50 | 0.25 || 10.15% | 10.15% |
| 3 || 2019-07-01 | 2019-09-30 || 10.50 | 0 | 10.75 | 0.25 || 9.79% | 9.78% |
| 4 || 2019-10-01 | 2019-12-31 || 10.75 | 90 | 101.00 | 0.25 || 8.05% | 1.00% |
+---++------------+------------++---------------+----------+-------------+------++--------+--------+
Something is still wrong with TWR computation for Q4, and if you have
been paying attention you know what it is already: big $90 buy-back is
recorded prior to the only transaction that captures the change of value
of Snake Oil that happened in this time period. Lets combine
transactions from 30th and 31st of Dec into one:
2019-12-30 Fear of missing out and growth of Snake Oil
assets:cash -$90
investment:snake oil
equity:unrealized gains -$0.25
Now growth of investment properly affects its price at the time of
buy-back:
$ hledger roi -Q --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+------++--------+--------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+======++========+========+
| 1 || 2019-01-01 | 2019-03-31 || 0 | 10 | 10.25 | 0.25 || 9.53% | 10.53% |
| 2 || 2019-04-01 | 2019-06-30 || 10.25 | 0 | 10.50 | 0.25 || 10.15% | 10.15% |
| 3 || 2019-07-01 | 2019-09-30 || 10.50 | 0 | 10.75 | 0.25 || 9.79% | 9.78% |
| 4 || 2019-10-01 | 2019-12-31 || 10.75 | 90 | 101.00 | 0.25 || 8.05% | 9.57% |
+---++------------+------------++---------------+----------+-------------+------++--------+--------+
And for annual report, TWR now reports the exact profitability of our
investment:
$ hledger roi -Y --inv investment --pnl "unrealized"
+---++------------+------------++---------------+----------+-------------+------++-------+--------+
| || Begin | End || Value (begin) | Cashflow | Value (end) | PnL || IRR | TWR |
+===++============+============++===============+==========+=============+======++=======+========+
| 1 || 2019-01-01 | 2019-12-31 || 0 | 100 | 101.00 | 1.00 || 9.32% | 10.00% |
+---++------------+------------++---------------+----------+-------------+------++-------+--------+