Investment portfolio return calculation

Based on the most helpful WSO content, here’s how you can approach your portfolio return calculation challenges:

1. Short-term Investments (like the 45-day loan):

   • The issue with using XIRR for short-term investments is that it annualizes the return, which can lead to misleadingly high figures. Instead, you can calculate the actual return for the period and then weight it appropriately when calculating the total portfolio return.
   • For example, in your case:
     • Loan amount: $1,000,000
     • Interest earned: $75,000
     • Return for the period = $75,000 / $1,000,000 = 7.5%
   • When aggregating this with other investments in the portfolio, you can use a weighted average return approach or include it in a cash flow model for the portfolio's overall IRR calculation.

2. Write-offs and Total Portfolio IRR:

   • To calculate the total portfolio IRR, you need to treat the portfolio as a single investment with aggregated cash flows. This means summing up all the cash inflows and outflows for the portfolio over time.
   • For your example:
     • Investment 1: $1,000,000 with a 12% return = $1,120,000 cash inflow
     • Investment 2: $750,000 with an 8% return = $810,000 cash inflow
     • Investment 3: $800,000 write-off = $0 cash inflow
   • Total cash outflow = $1,000,000 + $750,000 + $800,000 = $2,550,000
   • Total cash inflow = $1,120,000 + $810,000 + $0 = $1,930,000
   • Use these cash flows to calculate the portfolio IRR. You can input them into an Excel IRR function or similar tool to determine the overall return.

3. Key Considerations:

   • For short-term investments, if reinvestment opportunities are not available at the same rate, you might want to use a more conservative approach, such as calculating the weighted average return for the portfolio.
   • Write-offs should be treated as a complete loss in the cash flow model, as you’ve done in your example.

If you’re looking for more detailed guidance, you might find this thread helpful: https://www.wallstreetoasis.com/forum/real-estate/trying-to-understand-…</a">Trying to understand the concept of IRR. It dives into IRR concepts and how to handle various scenarios.

Sources: Trying to understand the concept of IRR, Rough mental return calculations?, https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, Real Estate Private Equity Technical Qs, Relationship among Cap Rate, IRR, Discount rate and NPV