How cash affects IRR in down market?

John W Ranby Trustee PGM Cariboo Trust on

While preparing my club's annual report, I include the IRR
comparison between my club and the Vanguard 500 Index as
computed using the "Performance Bench Mark" tool. I also
include the stock minus cash IRR calculation created by
"Investment Performance.

In the last several "up" market years, the stock minus cash
IRR has been higher than the Performance Bench Mark. Totally
understandable as the cash gained no value so it acted as a
drag on the club's overall IRR.

However this year, both the club's and Vanguard's IRR are
negative. Therefore, I would have expected the stock minus
cash IRR to be a bigger negative than the club bench mark as
the cash should have be a moderating influence.

The reported results:

Performance Bench Mark: Club -1.8; Vanguard -5.5
Investment Performance: Club -1.4

Can someone explain why the calculation containing the cash
has a larger negative IRR than the calculation of stocks
only.

Jack Ranby

Linda Glein on

I would expect the cash impact to be what you see: less of a
negative. IOW, the cash with zero change is a moderator.
That's what our club also experienced. We're down less than
the Vanguard index is down for 2018.

But I'm often wrong, so I look forward to someone more
knowledgeable to speak up.

ira smilovitz on

I don't think the results are that straightforward. While the cash is a moderating factor, you need to also consider the length of time it's moderating a rise vs. a decline. There will also be an impact due to the relative amounts of cash and stock. In a rising market, a fixed amount of cash will have less impact as time goes on, more impact in a falling market.

Ira Smilovitz

On Wed, Jan 9, 2019 at 12:59 PM Linda Glein via bivio.com <user*21345500001@bivio.com> wrote:

I would expect the cash impact to be what you see: less of a
negative. IOW, the cash with zero change is a moderator.
That's what our club also experienced. We're down less than
the Vanguard index is down for 2018.

But I'm often wrong, so I look forward to someone more
knowledgeable to speak up.

Mark Eckman on

Also remember, it is not the Vanguard Index, its a Vanguard fund tracking the index. The fund does have some cash of its own as it manages people buying and selling shares of the index fund. While i don't believe this is a significant factor, it supports Ira's answer that this is not that straightforward. Lots of moving parts.

Mark Eckman

On Wed, Jan 9, 2019 at 12:47 PM ira smilovitz via bivio.com <user*2883400001@bivio.com> wrote:

I don't think the results are that straightforward. While the cash is a moderating factor, you need to also consider the length of time it's moderating a rise vs. a decline. There will also be an impact due to the relative amounts of cash and stock. In a rising market, a fixed amount of cash will have less impact as time goes on, more impact in a falling market.

Ira Smilovitz

On Wed, Jan 9, 2019 at 12:59 PM Linda Glein via bivio.com <user*21345500001@bivio.com> wrote:
I would expect the cash impact to be what you see: less of a
negative. IOW, the cash with zero change is a moderator.
That's what our club also experienced. We're down less than
the Vanguard index is down for 2018.

But I'm often wrong, so I look forward to someone more
knowledgeable to speak up.

Mark Eckman

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