Finance: What are Time-Weighted Rate Of Return and Present Value?

What are Time-Weighted Rate Of Return and Present Value? The Time Weighted Rate of Return is a calculation for the compounded growth rate within an investment portfolio, with the presumption that gains are reinvested back into the portfolio. Present Value refers to the discount level on future funds based on their worth at present when factoring in the wait time for receipt.

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Transcript

00:20

whole lot more information here Tto answer Did you buy

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thirty eight million and two dollars worth of lottery tickets

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and that last two dollar ticket got you seventy six

00:28

million in winnings Was that like a good investment Or

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how about this You took thirty six years to double

00:35

your money Was that good I answer to both No

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not at all The lottery ticket example is a risk

00:42

waited return The lottery famously takes advantage of ignorant people

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spending their hard earned money on tickets representing dreams but

00:50

which have horrible odds of any kind of decent pay

00:52

back But the lottery makes go into a vegas casino

00:55

look like actually a good deal so you may win

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but it's a bad risk no matter how you look

01:00

at it And hey somebody has to pay those teacher

01:03

pension bill So why shouldn't it be people who didn't

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graduate high school Right Well the time waiting is a

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big deal to in a world where the stock market

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broadly speaking doubles on its own About every eight nine

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ten twelve years Something like that This calculation is done

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over very long periods of time and it's held true

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for about a century and change in america So if

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he took thirty six years to double your money well

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it implies you only made two percent a year as

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your rate of return Remember that rule of seventy two

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thing Yeah that right there Seventy two divided by thirty

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six and you get a whopping two percent return Well

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in that same period of time the market might have

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doubled in four times So the ten grand that double

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to be twenty grand in thirty six freakin years under

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your watch we'll have you just put it into an

01:47

index fund of the s and p five hundred over

01:50

that same time period Well it would have doubled once

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along the timeline here to be twenty grand then doubled

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again here to be forty grand and then doubled again

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here to be a tigre rine and then ah forthe

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doubling right here after thirty six years maybe one hundred

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sixty grand And that's just an index fund Nothing fancy

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Not warren buffett Just a basic vanilla index fund that

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anyone with two hundred fifty bucks in their pocket can

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buy And it's worth noting dividends which often get ignored

02:17

in the financial press actually matter a ton when it

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comes to the calculation of long term investment results Generally

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speaking that continued payment of dividends is a low risk

02:25

adventure Very few companies ever cut or fully do away

02:28

with their dividends And if they do well it means

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a pretty much everything is rotten in denmark so you

02:34

can count on dividends The bolster overall returns that historically

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dividends have had a wide range of somewhere between two

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and seven or eight percent for the mid range of

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the s and p five hundred But if you pegged

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them around and three ish percent today and changed to

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reflect the modern era well then the overall market need

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only compounded about five percent To deliver that five plus

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three percent and change eight ish percent total returns That

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will allow the stock market to double about every nine

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years or so right so we're ignoring taxes here but

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we're ignoring the use of dividends proceeds to buy more

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shares every quarter as well when those dividends air paid

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So when you think about time and risk think about

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them like they're a kind of financial stone soup which

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when mixed together with the right spices of tax hedges

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leverage and a bull market well make a really nice

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retirement meal and you don't even need your teeth on 00:03:22.773 --> [endTime] a bonus