Investing 
7
comments

How Vanguard Calculates Historical Growth

Email  Print Print  

If you’re a long time investor with Vanguard, chances are you’ve taken a look at their “Hypothetical growth of $10,000″ chart included with each of their mutual funds. If you’re like me, chances are you take a peek but never spend much time digging much deeper. I tend to focus on expense ratio, average annual performance versus a benchmark, risk potential, and some other metrics like SEC yield, portfolio composition and characteristics.

Reader Javier looks a little more closely and found something that seemed, at least initially, distressing. He took a peek at Vanguard’s Short Term Treasury Fund (VFISX) and found the nice upward trending chart a little at odds with the one at Yahoo. At first glance, it looks significantly different (stretch it out to start in 2000).

So he emailed Vanguard to ask what was up… and this is their reply:

As mentioned in our previous e-mail, Vanguard’s chart shows a hypothetical one time investment of $10,000 with the funds dividends and capital gains distributions reinvested. This graph depicts the calculation of total return for the time period specified.

If you would like to view the daily price history chart on our website you can go to the same chart as you did previously, however, there is a link that says “view price history chart”. Simply click on the link and the chart will resemble the Yahoo! chart.

The main problem with using a price history chart is that the size of spikes and dips seems amplified even if the range is really not that great. This fund is a great example – as of October 31, 2010, the chart shows a low of $10.18 and a high of $10.94. The range of 76 cents is a mere 7.45% change from the beginning value.

Our default Growth of $10,000 chart, however, shows the power of compounding (through reinvestment of dividends and capital gains) and long-term investing. Starting at a flat $10,000 investment, after ten years of continuous reinvestment in the fund, the total value is $15,756.77 – a cumulative return of almost 57% as of October 31, 2010.

Although Vanguard does not provide customized total returns, you may use one of the following formulas to calculate the total return of a fund.

If the fund has made no distributions >>

[(Ending price / Beginning price) - 1] x 100 = Total Return

Or, if the fund has made distributions, follow these four steps >>

1. (1st (earliest) distribution/1st reinvestment price) + 1 = 1st reinvestment factor
2. [(2nd distribution x 1st reinvestment factor) / 2nd reinvestment price ] + 1st reinvestment factor = 2nd reinvestment factor
3. Repeat step 2 until all reinvestment prices have been used.
4. [(Ending price x Last reinvestment factor / Beginning price) - 1] x 100 = Total Return

Please remember:
* The beginning price is the last closing net asset value (NAV) before the beginning of the period.
* The calculations must go to at least five decimal places to ensure accuracy.
* Total return calculations are net of expenses.
* Total return percentages illustrate past performance and are not representative of an investment made to the fund today.

A quick summary of the larger email is that reinvestment makes a very big difference. While it’s hard for us to look back at the historical dividends and distributions of the fund, the basic argument is that while the price can fluctuate, it’s fluctuation is small compared to the compounded gains and reinvestment of dividends.

It’s a plausible explanation that satisfies me (and Javier). Does it satisfy you?

{ 7 comments, please add your thoughts now! }

Related Posts


RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

7 Responses to “How Vanguard Calculates Historical Growth”

  1. DIY Investor says:

    Most of the gain in a short term treasury fund will be from reinvestment and compounding of interest. It is like a CD. The price change is zero. All of the gain comes from interest and reinvesting interest.

  2. zapeta says:

    Their explanation makes sense. I think the fact that they bothered to go in to it means they aren’t hiding anything.

  3. JXZ says:

    Makes a lot of sense to me. It sends a message to encourage long-term investment rather than speculation. However, I do believe that they need to disclose their methodology upfront.

  4. Under the Weather says:

    BOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOORRRRRRRRRRRRRRRRRRRRRRRRRRRRIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIINNNNNNNNNNNNNNNNNNNNNNNNNNNNNNGGGGGGGGGGGGGGGGG!

    Who wants lottery tickets?!?!?!

    • billsnider says:

      All I want to say to your comment is OUCH!. It does a disservice to the reader here who is seeking to better understand their financial life.

      I once had the same question with a Fidelity fund I owned. It took me a while to understand the difference. I find it hard to believe that I and Javier are the only people who were puzxzled by this. So I support and appeciate the help here.

      Bill snider

  5. Chuck says:

    Yes of course it makes sense. Looking at a price chart for investment performance is absurd. The Vanguard rep said it more nicely, of course. :)

  6. Dave says:

    I basically calculate my own investment performance the same way – depending on the software you use (I use quicken) or your broker (I’ve used several), they can calculate returns differently. Quicken, at least the default way of setting it up, doesn’t count re-investment of dividends as gains, rather it counts them as “investments in”… I personally want to find out how much money my initial plus my contributions have made, which includes re-investment as a gain.


Please Leave a Reply
Bargaineering Comment Policy


Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2014 by www.Bargaineering.com. All rights reserved.