Explains what the ANP (absolute net performance) and the FREQ (fixed rate equivalent) are, how they compare, and why they should be used to measure the performance of individual investors' financial accounts. No math or other special expertise is required. For an even more concise introduction to the ANP and the FREQ, go to the GreaterThanZero home page. For more in-depth information, including a full mathematical treatment of the FREQ, please refer to the GreaterThanZero documentation center.
Let's assume you have a brokerage account that contains just one mutual fund. The performance of the mutual fund over the last five years looks like this:
Suppose that at the beginning of the five years, you had $100,000 in the account. In June of 2004, when the fund had lost half its value, you received a million dollars exercising some stock options, and you put it all in the account. How much do you have now, at the end of 2006? The $100,000 are back to where they were, and the one million dollars has doubled, so your account balance is $2,100,000.
Now let's say you don't really pay much attention to your money. Your financial advisor handles all that for you. You call her up and ask, “How did my investments perform over the last five years?” The advisor looks at your account and sees one mutual fund in there. She looks up the five year performance of that fund. It says: zero percent return over the last five years. Flat. So your advisor says to you, “Your portfolio ended flat for the last five years.” That is of course correct. But meanwhile, $1.1 million of your money have turned into $2.1 million, almost twice as much. So what does the 5 year performance of your portfolio tell you about the performance of your money? Next to nothing.
The reason for this is of course the fact that you made a deposit along the way. To overcome this problem, you could look at the performance of each of your deposits separately. For the $100,000 you started with, that's the trailing 5 year performance of the mutual fund, which was flat. For the one million you put in two and a half years ago, you would need to know the trailing 2.5 year performance of the mutual fund. That's not an easy number to get, because the mutual fund company will only report things like the trailing 1, 3, 5, and 10 year performance. So there's a problem already. But it gets worse. In the presence of numerous deposits, knowing the performance of each individual deposit will not add up to a meaningful picture. And what about withdrawals? This is a dead end.