Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Understanding and Navigating the 4 Phases of Retirement from Dr. Riley Moynes
Executive Summary:
Retirement involves significant financial and emotional transitions, impacting routines, identity, and purpose.
Dr. Riley Moynes’ framework of four phases helps retirees navigate these changes: the vacation phase, the loss and lost phase, the trial and error phase, and the reinvent and rewire phase.
Addressing emotional challenges is crucial to avoid depression and find fulfillment in retirement.
Engaging in meaningful activities and serving others can lead to a rewarding and purpose-driven retirement.
Lastly, understanding these phases and staying proactive ensures retirees can make the most of their golden years.
Retirement is one of the biggest financial transitions of your life, so many prepare for years or even decades in advance.
From maximizing workplace retirement plans to optimizing Social Security benefits timing, retirees-to-be invest significant time understanding the financial nuances and tradeoffs needed for a secure and lasting retirement.
But, while many prepare financially, few consider the non-financial side of retirement, specifically, the emotional and psychological transition they will experience in retirement.
And that can be hard, because the reality is that leaving behind your career, whether you were financially ready or not, can create significant challenges, ultimately leading to higher rates of divorce and depression among retirees.
Fortunately, just like you can prepare for the financial aspects of retirement, there are things you can do to smooth out the emotional and psychological ride into retirement, helping you to “squeeze all the juice out of retirement.”
The first phase of retirement is the vacation phase – a time when you enjoy your newfound freedom.
Just like being on vacation, you can wake up whenever you want and spend your time however you want – pure bliss, right? Well, just like being on vacation, there often comes a point where you’re ready to go back home, settle into your routines, and “sleep in your own bed again.”
In other words, the new, fun, and exciting feeling of being able to do anything at any time wears off, and you’re left to wonder: is this all there is?
According to Dr. Riley Moynes, the vacation phase of retirement typically lasts a year before it starts to lose its luster. He says that once you find yourself questioning if this is all there is, you have officially moved on to phase 2.
Phase 2: Loss and Lost
As the name implies, phase 2 is not a fun place to be, and in his Ted Talk, Dr. Moynes describes it for many as “feeling like getting hit by a bus.”
In this phase, retirees can experience 5 major losses:
The 5 Major Losses in Retirement
Loss of Routine: While work provides structure and routine, the newfound freedom of retirement can be unsettling for many.
Loss of Identity: Many people intertwine their identity with their work, often defining themselves by their job (e.g., “I am a doctor” or “I am an accountant”).
Loss of Relationships: Strong career relationships built over decades can suffer as you no longer interact with colleagues daily.
Loss of Purpose: Many derive their sense of purpose from their work, especially those who feel they are doing their life’s work.
Loss of Power: Retirees often lose the power and influence they once had as key decision-makers in their careers.
Ultimately, these major losses can lead to what Dr. Moynes refers to as the 3 D’s: depression, divorce, and cognitive decline. This period can be incredibly challenging as retirees struggle to find a new sense of purpose and direction without the familiar structure of their careers. Many may feel isolated and uncertain about how to move forward, which can exacerbate these feelings of loss.
Fortunately, by the time retirees decide they can’t go on like this, they have officially entered phase 3: trial and error.
Phase 3: Trial & Error
Phase 3 is all about throwing things at the wall to see what sticks.
It’s a time when retirees ask themselves a couple of powerful questions:
How can I make my life meaningful again?
How can I contribute?
Dr. Moyne’s advice is simple: do more of the things you love and the things you’re good at.
And he says if you are having trouble figuring out what that is, start with some reflection. Ask yourself: a) what are some of your greatest accomplishments and b) what do you love doing?
Where those two things overlap is where you should focus your time.
Remember, this phase is all about experimenting and finding what brings you joy and fulfillment. Interested in volunteering at your local community garden or library? Go ahead and give it a try.
And if you’re struggling to come up with ideas, here are ten activities to consider during retirement:
10 Ideas to Find Purpose in Retirement
Volunteering: Engage in volunteer work at local non-profits, schools, hospitals, or community gardens. Volunteering allows you to give back to the community, meet new people, and find a sense of fulfillment.
Mentorship: Offer your expertise and experience to mentor younger professionals in your previous field or other areas of interest. This can be done through formal programs or informal networks.
Lifelong Learning: Enroll in classes at local community colleges or online platforms. You can study subjects that interest you, ranging from history and literature to science and technology.
Hobbies and Crafts: Dive deeper into hobbies you’ve always enjoyed or pick up new ones. Whether it’s painting, woodworking, gardening, or cooking, engaging in creative activities can be very fulfilling.
Fitness and Wellness: Focus on maintaining your physical health through activities like yoga, swimming, hiking, or joining a fitness group. This can also include mental wellness practices like meditation or mindfulness.
Travel and Exploration: If you enjoy traveling, consider planning trips to places you’ve always wanted to visit. Travel can broaden your horizons and provide new experiences and memories.
Writing and Blogging: Share your life experiences, knowledge, or interests through writing. Start a blog, write a memoir, or even work on a novel. This can be a great outlet for self-expression.
Part-Time Work: Find part-time work or freelance opportunities in areas you’re passionate about. This can help maintain a sense of structure and purpose while allowing you to use your skills.
Community Involvement: Get involved in local community groups or organizations. This can include joining clubs, attending town meetings, or participating in community events.
Family and Friends: Spend quality time with family and friends. Strengthen your relationships by organizing regular get-togethers, outings, or family vacations. Being an active part of your loved ones’ lives can bring immense joy and fulfillment.
Phase 3 is all about experimenting with different activities until you find what brings you joy. Remember, this process is unique for everyone—there is no right or wrong—and it can continue to evolve throughout retirement
Last but not least, on to Phase 4: Reinvent and Rewire.
Phase 4: Reinvent & Rewire
In phase 4, retirees find answers to the most important question of them all: what’s the point?
But, in Dr. Moynes’ experience, not everyone makes it to phase 4, with some retirees bouncing back and forth between phases 2 and 3. But, for those that do, he finds that it almost always involves service to others, in some capacity.
This could involve giving back to your community through volunteer work or mentorship. In his TED Talk, Dr. Moynes mentions a retiree who found joy in delivering “piping hot pizzas to hungry humans” part-time, not for the money, but for the satisfaction of serving others.”
For Dr. Moynes, success in phase 4 came through a friendship he formed that evolved into community classes teaching other friends how to use their iPhones and iPads. He joked that it all started because he and his fellow retirees were all given various Apple products for Christmas from their kids, but half of them could barely figure out how to turn them on, let alone use them. So, he and a friend taught a class on how to use their devices that snowballed into hundreds of classes on a variety of subjects over the years: from how to repair bikes, to learning different languages.
The best part of all? Dr. Moynes has found that through Phase 4, retirees can recover many of the losses from Phase 2: routine, identity, relationships, purpose, and power. This phase not only helps retirees regain a sense of stability but can also bring renewed meaning and satisfaction to their lives.
So, knowing what you know now, where do you go from here?
Dr. Moynes’ advice is simple:
Here Are 4 Steps You Can Take to “Squeeze the Most Juice” out of Retirement
Enjoy the vacation in phase 1.
Be prepared for the losses in phase 2.
Try as many different things as possible in phase 3.
And lastly, squeeze all the juice out of retirement in phase 4.
By understanding and embracing these four phases, you can turn the challenges of retirement into opportunities for growth, fulfillment, and happiness. Whether you are just beginning your retirement journey or are already navigating its complexities, remember that each phase is a step towards a richer, more rewarding life. The key is to stay open, flexible, and proactive in finding what makes your retirement truly golden.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
As Albion grows and matures – and we’re now in the early years of our fifth decade – it’s inevitable that we find ourselves celebrating the retirement of long-time team members, honoring their contributions, yet continuing into the future without disruption. We’ve had a few over the years and it’s time to celebrate another. Doug Wells, Partner and head of business development, will be retiring in early July. Doug reached out to Albion in the 1990’s when he was looking for financial planning advice. He liked what he saw. Several years later, in 2002, Doug came back and pitched Toby and me on why we should hire him. Those of you who know him know he can be persuasive! We brought him into Albion and never looked back. His desire to learn was immediately apparent and within a few years had earned, in addition to his MBA, the CFP (Certified Financial Planner) and CFA (Chartered Financial Analyst) designations. He helped us along our path of continuous improvement where we strive to add more value to everything we do on behalf of clients. And he worked to get the word out into our community about Albion. Over the years he turned his network of business associates into a group of lifelong friends. From being a ski instructor at Deer Valley, hosting a radio show on KPCW, trying Bikram Yoga, or organizing group mountain bike rides, Doug has never shied away from trying new things. And with that spirit, he is trying a new chapter in his life, that of retirement.
He has helped scores of Albion clients make the decision to retire. More often than not the decision is far more personal than financial; it can be difficult to leave what you’ve known for decades and step off into the unknown. Having successfully counseled people through the transition he knew it was time to follow his own advice.
We will miss Doug. His energy, upbeat attitude, and intelligence are all characteristics we knew we could depend on. But we also know he leaves behind a highly functioning team that is already filling the void he leaves behind. Thank you, Doug, for choosing Albion!
Note: This blog post is an excerpt from Albion’s Quarterly Letter to clients. Find the entire letter posted in the Learning Center of this website.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Albion Financial Group is proud to announce and celebrate the firm’s newest Certified Financial Planner®. Financial Planners are engaged in the detailed aspects of the financial advising relationship. Their efforts make it possible for our clients to seamlessly envision and plan for a variety of prospective scenarios. Their contribution to the team is essential as we work to guide clients toward making a lifetime of good financial decisions.
Bitcoin, and more broadly cryptocurrencies, are seeing increasing news coverage. This has left many wondering: “What is bitcoin and how does it work?” For those trying to better understand bitcoin and cryptocurrencies, here’s our understanding on a handful of frequently asked questions:
What is bitcoin?
Bitcoin is a digital “currency” that can be used to purchase goods and services (only at select locations, for now), or held as a store of speculative value. There are many differences between bitcoin and traditional currency, but the principal difference is that bitcoin is not issued by a government or regulated by a government entity.
Where did bitcoin come from?
This is where it gets a bit mysterious. Bitcoin was created by “Satoshi Nakamoto”, an unknown individual or group of individuals. Under this pseudonym a white paper was circulated in 2008 that first described the concept for a transparent, visible peer-to-peer payment system authenticated by a vast network that does not require the presence of a third party middleman – such as banks or other financial institutions. By combining cryptography and unique software protocols, Satoshi Nakamoto originated a payment system that allowed participants to transact directly with one another.
How is it possible to make currency transactions without banks?
Bitcoin transactions have been made possible with the encryption technology underpinning cryptocurrencies known as “blockchain.” Blockchain is a global Internet-wide distributed network that is at its core a decentralized accounting ledger recording every bitcoin transaction. The blockchain ledger is shared by way of an extensive network and the information therein is validated by network “miners” every ten minutes by solving mathematical puzzles using very fast computers and high amounts of electricity. This network validated ledger is crucial as it ascribes proof of ownership to digital assets like bitcoin. If the ledger proves ownership, participants can have trust when making transactions.
Tying together the concept of bitcoin and blockchain, think of it this way – the bitcoin “coins” themselves are simply seats within the aforementioned blockchain ledger. Anyone can buy into or sell out of this ledger at any time – with no prior consent, and with little-to-no fees. Therefore, when buying a bitcoin you are essentially acquiring one of a number of fixed slots within this ledger. You leave the ledger by selling your bitcoin to someone else who wishes to buy in.
If I want to buy bitcoin, how would I make a purchase? Do I need to buy a whole coin?
There are many exchanges out there that allow participants to deposit US dollars (or other widely accepted global currencies) directly from traditional bank accounts in exchange for bitcoin. Some cryptocurrency exchanges also have mobile apps allowing participants to buy bitcoin anytime, anywhere.
Additionally, participants need not buy a whole bitcoin to participate. The smallest unit of bitcoin, a “satoshi”, is the size of one hundred millionth of a single bitcoin (0.00000001 BTC).
What are the risks to purchasing and holding bitcoin? The current price seems high!
It depends on the type of risk one is referring to. Let’s start with general cybersecurity threats. Cryptocurrency exchanges, including those which trade bitcoin, have been hacked before, and will likely be hacked again. Perhaps the most notable example was in 2014 when “Mt. Gox”, the largest bitcoin exchange at the time, failed as a direct result of hackers and vast bitcoin theft. Security surrounding cryptocurrency exchanges have notably improved since Mt. Gox’s failure. Individuals can use bitcoin digital wallets and vaults that are encrypted with a secure network key which dramatically reduces the possibility of being hacked.
Another key risk worth touching on is the possibility of loss of capital for those speculating on its price. Bitcoin has experienced a monumental run as of late. There are a variety of opinions and market variables as to why this has occurred. Will this price rally continue, or crash? Nobody knows for sure. However one way to think about it is, by design, bitcoin was given a finite supply – determined at inception to be 21,000,000 bitcoins – and we are now seeing growing awareness leading to rising demand. This basic supply / demand dynamic may help describe, at least at some level, recent price moves in bitcoin. That being said, just because more cryptocurrency enthusiasts are now entering the market seemingly pushing up prices does not mean everyone should take a position. With a greater understanding of bitcoin – both its potential opportunities and risks – paired with careful holistic wealth advice, more educated decision making can be made on potential bitcoin / cryptocurrency participation.
We hope that this FAQ provides a helpful introduction to bitcoin / cryptocurrencies, and perhaps even sparks your desire to want to learn more. The investment team at Albion Financial Group is well versed in bitcoin / cryptocurrencies and blockchain technology. Please reach out to us at 801-487-3700 or info@albionfinancial.com if we can answer your bitcoin, investment, or financial planning questions.
Disclaimer: Information provided is for educational purposes only. This is not a recommendation to buy or sell any security or cryptocurrency. There are significant risks associated with cryptocurrency that are unique and must not be taken lightly. It is critical that you perform your own due diligence prior to engaging in any buy or sell transaction. The value of bitcoin, or any cryptocurrency can, and may, ultimately go to zero.
A quick reference for tax rates, savings and retirement contributions, college savings strategies, as well as Social Security and Medicare information.
Everyone’s financial situation is unique – the information found in the 2021 Planning Guide should only be used as a foundation for discussing your individual circumstances with a CERTIFIED FINANCIAL PLANNER™ practitioner, legal or tax professional.
The wealth advising team at Albion Financial Group understands the complexities of the current wealth management environment and would be honored to discuss your financial situation and strategies that may help you reach your personal financial goals.
Please give us a call at (801) 487-3700 or email dpope@albionfinancial.com.
We wish you a prosperous 2021.
Devin Pope, CFP®, MBA Senior Wealth Advisor Albion Financial Group
You’ve worked hard for your employer for several years and been rewarded with options on the company stock. Now stock options make up a large share of your wealth and you’re thinking it’s time to pay more attention. But what are these options worth and how should they be handled? As employers have grown more creative with compensation, questions like these no longer apply only to the executive suite. In many companies options are now available to employees of all levels and for some represent a substantial portion of their total compensation package. Understanding how stock options work, and determining how to maximize their value can be complicated. While employee stock options can be great wealth creation vehicles, understanding what they are and how they work will greatly increase the odds of a positive outcome.
Stock options grant the holder the right to purchase shares in a company at a specified price (exercise price) for a specified period of time (expiration). The aim of granting options is to incentivize employees; aligning their interest with that of the company. By doing so the company hopes to increase operational performance and thus profitability. There are two types of options awarded; incentive stock options (ISOs) and nonqualified stock options (NQSOs). The key difference between the two is how they are treated for tax purposes.
Incentive Stock Options (ISOs) ISOs offer more favorable tax treatment than NQSO’s, taxing the gain on the sale of the underlying shares at long-term capital gains rates if the holding rules are correctly followed. There are two important holding periods to meet the holding rule requirement. The first holding period begins with the grant date of the option. The option holder must wait at least two years from the grant date prior to selling the underlying shares in order to have the gain taxed at long-term capital gains rates. The second period begins when the stock is transferred to the employee. In order to receive long-term capital gains treatment the shares must be held for at least one year following the date the stock was transferred. If the two holding periods are met then the gain will be considered long-term. Be aware that ISO’s are an alternative minimum tax (AMT) preference item and in certain circumstances can trigger AMT.
Nonqualified Stock Options (NQSOs) NQSOs are less tax favorable, but are more commonly used as they are not subject to the same restrictions on issuance as ISO’s. When a NQSO is exercised tax is due at ordinary income rates on the difference between the exercise price and the value of the stock at the time of exercise. The exercise price becomes the cost basis for the position going forward. When the shares are eventually sold they will be subject to short-term or long-term capital gains based on the length of the holding period from the time of exercise.
Option Risks Stock options are a great way to build wealth and over time may come to represent a large share of one’s net worth. However there are risks. First and foremost is concentration. Not only does the employee rely on the company for income but he also depends on the ongoing success of the company if his net worth is to be maintained. A failure of the company is a double whammy; the income is gone and the stock option assets on his personal balance sheet have greatly diminished in value. It is important to sensibly diversify the balance sheet from time to time to avoid having all eggs in one basket.
Exercising Options The method used to exercise options can also have unintended consequences. In the late 1990’s many technology and internet based companies experienced substantial stock price appreciation. Employees of these companies were suddenly wealthy and exercised their stock options. Given the strength of the companies in the market many employees chose to hold the shares for further appreciation. When the bottom fell out and the share prices dropped these same employees discovered that their tax bill, based on market price at exercise, was greater than the now depressed value of the shares. There were many variations on this theme but the net result was the same; when the share prices plummeted the option value disappeared and the option owner found himself with liabilities but no assets left to cover them.
An idea often considered is to hedge the exercised shares by purchasing a corresponding put option while waiting for twelve months to pass in order to receive long-term gains treatment. Unfortunately this does not work. Such a strategy suspends the holding period in the eyes of the IRS and the holding period for capital gains purposes remains suspended as long as the put is in place. Fortunately all is not lost. With proper planning and a clear vision of what employee stock options can and cannot do an investor can design a strategy to protect against catastrophic downside loss while allowing participation in the ongoing success of the company. With a clear-eyed hard headed analysis the option owner can greatly increase the probability of meeting their long-term financial objectives.
Imagine; you invest $100,000 in a stock. Six months later you put another $100,000 into the same stock. Six months after that you sell all your shares for $300,000. After a few rounds of self- congratulation on your stock picking prowess you decide to calculate your return. You know you invested $200,000 and had gains of $100,000. Since your gain of $100,000 is 50% of the $200,000 invested your gain is 50%. While this is a straightforward calculation something doesn’t feel quite right. Should the fact that only half the money was invested initially with the other half invested midway through the time period cause you to adjust your calculation? In search of answers you go online and find two rate of return calculators. You enter your data and click to the answer. One says you earned 66%, even better than your own calculation had indicated. But the other says your rate of return was… Zero. Yes, zero. Something must be wrong. You recheck your data and determine that both answers are correct. Welcome to the exciting world of dollar-weighted versus time-weighted returns!
Ever since assets have appreciated people have worked hard to come up with methods to quantify their profit. At its simplest, the appreciation calculation is straightforward. Just divide the amount the investment appreciated by the initial value of the investment as in the example above where the $100,000 gain was divided by the $200,000 investment showing a rate of return of 50%.
However it starts getting a bit more complicated if during the period the performance is being measured money is added to or taken from the investment account. Dollar-weighted and time weighted return calculations are the two methods that account for cash inflows and outflows during the performance measurement period.
Let’s look at dollar-weighted returns first. While the calculation is straightforward the details are challenging. All you have to do is divide the gain by the average capital base. Gain is the amount left over after subtracting all the money put into the investment. Average capital base is a bit trickier; it is the sum of the initial investment plus or minus any funds added to or removed from the investment after the start date, adjusted for the time period the funds were in the account.
That’s a tough sentence; here is an example:
Suppose we start our investment account with $100. Six months later we add another $100. Six months after that we want to measure the performance for the previous 12 months. What is the average capital base? It is the initial $100 plus half of the second $100 added to the account, for a total of $150. Only half of the second $100 is included because it was only invested for half the period. If instead of adding funds, $50 had been removed from the account halfway through the performance period, the average capital base would have been $75; the initial $100 minus half of the $50 that was removed.
The advantage to the dollar weighted calculation compared to the basic calculation where gain is divided by the amount invested with no adjustment for cash inflows and outflows is that the dollar weighted calculation modifies the performance to reflect the gain relative to the funds actually available for investment.
Time weighted return takes dollar weighted returns one step further. In calculating time weighted returns, first you divide the performance period into smaller time periods; quarters, months, weeks and days are typical. Then for each of these smaller time periods a dollar weighted return is calculated. Finally, these smaller period returns are compounded to generate the time weighted return for the whole performance period.
Using time weighted returns further diminishes the impact of cash inflows and outflows on the actual return of the assets in the portfolio. A bit of math clarification is in order. When compounding multiple periods of return you must add 1 to each percentage number and then subtract 1 from your final result. Here is why. Suppose you are compounding quarterly and for three quarters in a row you earn 5% per quarter. Mathematically 5% is 0.05 so if we multiply 0.05 * 0.05 * 0.05 we get .0001, or one tenth of one percent. Whenever you multiply any number by a number less than 1 the product will be less than the initial number.
So here is what to do; add 1 to each percentage to be multiplied then subtract 1 from your answer:
1.05 * 1.05 * 1.05 = 1.16 1.16 – 1 = .16 = 16%. 5% per quarter compounds to a 16% total return after three quarters.
So which return calculation makes the most sense? It depends. The basic “gain divided by amount invested” calculation which does not take into account cash inflows and outflows provides the most clarity when you are trying to figure out how many more (or less) dollars you have than you did before investing. But it does not capture the impact of cash moving in and out of the investment account.
Dollar weighted returns capture more than just the return of the assets in the portfolio. They also give you a better idea of the returns earned on the money you had at risk. If your advisor helps you determine when to add funds to the account, or when it makes sense to pull money out, the dollar weighted return is more likely to highlight the impact of that advice. More typically, cash flows into or out of an account are driven by the client and are based on cash flow needs, savings strategy and other life events.
If you want to hone in exclusively on the impact of the investment decisions made within the portfolio then time weighted returns are likely the better measure. However most investors will find that investment portfolios experiencing large inflows and outflows will have time weighted performance that differs from managed portfolios that do not have such contributions and withdraws.
Of course if there are no cash inflows and outflows after the initial investment then all three performance calculation methods; gain divided by amount invested, dollar weighted, and time weighted, will show the same investment return. (great point …. Correct but not intuitively obvious).
Back to that opening problem; why did one performance method show a 66% return while the other showed a 0% return? Here are more details on the twelve months of investing. During the 12 month period the $100,000 investment lost half its value, to $50,000, in the first six months at which point an additional $100,000 was added. In the second six months the investment doubled in value so the $150,000 grew to $300,000.
First we’ll calculate the dollar weighted return which is the gain divided by the average capital base. The gain is $300,000 less the $200,000 that was invested, or $100,000. Next comes the average capital base. We had $100,000 for the full period and $100,000 for half the period for an average capital base of $150,000. $100,000 gain divided by the $150,000 average capital base is .666, or a 66.6% return. Not bad.
Next we’ll calculate the time weighted return and we’ll do it by calculating the dollar weighted return for two time periods and then compounding them. For the first six months the stock declined by $50,000 and the average capital base was $100,000 for a return of -50%. For the second six months the stock appreciated by $150,000 on an average capital base of $150,000 for a return of 100%. To compound these two periods we add 1 to each return and multiply them together:
First, add 1 to each period return; 1 – 50% = .5 1 + 100% = 2
Then multiply the adjusted return numbers together; 2 * 0.5 = 1
Finally, subtract the 1 from your result; 1 – 1 = 0 which equals 0.0%
Performance measurement should be a detailed and accurate exercise following prescribed performance calculation standards. Yet even when the calculations adhere to a standard the results can vary significantly depending on which performance calculation method is used. Next time you’re quoted an investment return you’ll know to ask a few follow-up questions to ascertain what the investment in question might have actually done for you.
John Bird, MBA, CFA, CFP / President Albion Financial Group jbird@albionfinancial.com (801) 487-3700
