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 Managing Return On Investment - A Strategy
 
        
 Return on investment compounded by time equals wealth.  
                                                 
 Consider an Individual Retirement Account (IRA) in the implementation of 
 this concept.  An annual $2000 investment earning an 8% return will 
 build a $518,000 nest egg over a forty year period.  The same annual 
 investment, earning 12% will produce nearly triple that amount, 
 $1,534,000, over the same period.  
        
                              Value ($ thousands)
    Yrs   Amount     2%   4%   6%   8%  10%  12%  14%  16%
  ÚÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
  ³     ³ $20,000 ³                                        ³
  ³ 20  ³    +    ³  79  103  138  185  249  337  457  620 ³
  ³     ³ $2000/yr³                                        ³
  ÃÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´
  ³     ³ $20,000 ³                                        ³
  ³ 30  ³    +    ³ 117  177  273  428  668 1081 1732 2777 ³
  ³     ³ $2000/yr³                                        ³
  ÃÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´
  ³     ³         ³                                        ³
  ³ 40  ³ $2000/yr³ 121  190  310  518  885 1534 2684 4720 ³
  ³     ³         ³                                        ³
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 If one does not live ostentatiously, this difference may not seem 
 important, as half a million dollars seems quite sufficient for 
 retirement.  Until one considers inflation.  Adjusted downward to 
 today's dollars, assuming 6% inflation, one's purchasing power would be 
 reduced to  $121,000 (8%-6%=2%) and $310,000 (12%-6%=6%), respectively.  
 The importance of achieving the higher rate of return now becomes quite 
 clear!  
        
 But how can an individual monitor his rate of return and thereby 
 hopefully control its direction?  One approach would be to invest solely 
 in low-risk original issue fixed income instruments (e.g. bonds, CD's, 
 and Treasury notes) with the intent to hold to maturity.  One could then 
 determine the approximate rate of return at any one time by computing a 
 dollar weighted average of the coupon rates of all securities held.  
 However this approach would be self-defeating because the rates of 
 return one would inevitably receive would not exceed inflation by much 
 over the long term.  

 The higher return on investment needed to retire comfortably generally 
 requires investment in equities and/or investment in fixed income 
 instruments timed to take advantage of interest rate swings.  This can 
 be done directly or through mutual funds.  However, since such 
 investments do not have fixed rates of returns nor guaranteed redemption 
 values, determining and tracking one's rate of return becomes important, 
 yet is also more difficult.  
 
 In the case of mutual funds, one might try to rely upon the return 
 rates stated by the fund managers or reported by tracking services.  
 These rates, however, are for a specified time period, and generally 
 will not represent the rates one has actually achieved.  This is due to 
 the differences in timing and amount of an investor's actual remittances
 and redemptions versus that assumed for the fund's reported rate.  
 
 
 
 

_
 
 


 The resolution to the timing issue is to compute return on investment 
 (ROI) using the internal rate of return method.  This calculational 
 technique takes into account both the timing and dollar weighting of 
 cash flows into and out of a portfolio as well as initial and ending 
 portfolio values.  
 
 Because internal rate of return must be computed using iterative 
 calculational method, for all practical purposes it must be calculated 
 by computer.  Techserve, Inc.'s family of portfolio managers, PFROI, 
 CAPTOOL, and CAPTOOL Global, compute IRR-ROI as well as perform many other 
 portfolio management functions (e.g. income reporting, capital gains
 reporting with three tax lot methods, portfolio tax planning, portfolio 
 reports and price downloading from Dow Jones, Compuserve, Dial/Data, etc).  
 
 A typical strategy for an investor using PFROI or CAPTOOL would be to 
 set a target rate of return pegged to an index such as the S&P 500 index 
 or the consumer price index.  For example, he may wish to exceed the S&P 
 500 index by 3% (because dividends not included in S&P 500), but also at 
 a minimum exceed the CPI by at least 8% over the long run.  Since PFROI 
 and CAPTOOL can both track up to three indices at a time, the user would 
 record the value of these indices each time a portfolio valuation is 
 recorded and stored.  

 The investor then would have PFROI or CAPTOOL generate performance 
 reports to see how the portfolio has performed versus these indices over 
 both the long and short run.  Lagging performance versus the S&P 500 
 would indicate that the investor is being too conservative in investment 
 selections and should re-evaluate his holdings.  Failure to stay ahead 
 of the CPI growth rate by the target margin would indicate a need to 
 rebalance the portfolio in favor of more inflation-proof holdings (e.g. 
 real estate, REIT's).  

 Upon nearing retirement, an investor would then typically reduce his 
 targeted return and re-deploy his assets accordingly in favor of safety.  
 Investors who have successfully pursued their strategy, however, may 
 find themselves with excess funds which they can commit to a separate 
 aggressive portfolio in pursuit of additional growth in wealth during 
 retirement.