How do you measure your portfolio performance if you bought and sold stocks, and received dividends during the year ? You can measure your return using the Internal Rate of Return (IRR). IRR is used to measure the average annual return when capital were added or withdrawn during the investment period.
This calculation is tougher than expected but it can be easily determined using “XIRR” function in Excel.
Note: inflow and outflow of funds are reflected in positive and negative values respectively.
Formula = XIRR (‘select $’, select dates’)
Knowing your rate of return will help you make better financial decisions.