|Re: 12CP Cash Flow Bug|
Message #3 Posted by Les Wright on 8 June 2006, 9:00 a.m.,
in response to message #1 by Katie Wasserman
I have to admit as one who has newly acquired a 12CP out of novelty and curiosity that I am not surprised to learn about stuff like this.
I am learning very quickly not to take for granted that when I store a value in any financial register that it will remain unmolested after a calculation. Fortunately, the examples in the manual seem to warn you about this more often than not, but I have been caught more than once over the past few days.
I have to confess--perhaps sacrilegiously in a forum that celebrates the handheld--that most of my recent forays into the mysteries of financial computation have been done in Excel. I have even gone so far not to trust the internal routines there and set up the computations myself.
For example, it occured to me that even though I know a lot about mortgages, loans, and leases--in general, TVM situations with regularly spaced payments of equal value--I really did not understand where my mutual fund manager got the quarterly, annual, 3-year, and 5-year returns reported my my quarterly reports.
I guessed it was a variant of the discounted cash flow analysis problems presented in the hp12cp manual, but of course I couldn't use the calc because my cashflows (contributions) were not evenly spaced. I discovered the Excel XIRR and XNPV functions, but even then at first didn't put my trust entirely in these, which are fortunately pretty clearly documented.
Rather, I set up a spreadsheet to compute the FUTURE (i.e., end-of-period) value of each cashflow, weighted according to when it was invested, summed up the terms, subtracted the actual end-of-period portfolio value, and adjusted my guess of IRR (manually or by Goal Seek) until this difference went to zero. Of course, this ended up agreeing with the XIRR result, since I was basically using a variant of the very formula that Excel uses.
Of course, these computations only roughly approximated my reported returns, and in some cases were off by over 100 basis points. That's about the point I learned about the difference between time-weighted and money-weighted rates of return, and figured my reports gave the former--it is, after all the industry standard. Computing these returns in a spreadsheet, either by determining the exact value of my portfolio at the time of a cashflow or estimating the return for a particular quarter using the computationally pretty simple Modified Dietz Method, my numbers are very close to or often the same as the reported ones (except for the fall quarter of 2002, which differs by 10 to 20 basis points for reasons that I can't figure out). As one devoted to a lifetime of mathematical curiosity, I found this very gratifying.
My point of sharing this little saga is to make this point: I felt more confident in my financial computing in a visually informative and highly user-controlled spreadsheet environment. I learned a lot, and if there was a mistake in data entry it was easily found. Which leads to my admittedly scandalous question: what is the advantage of handheld financial computing devices like the 12cp, 17BII, etc? I am coming at this from the angle of a fascinated amateur, but in the 21st century do people who do this for a living (investment and real estate professionals, bankers, accountants, etc.) routinely whip out a financial HP on in the car or cafe or whatever to make a mission critical decision? Or do they wait to get back to a laptop or desktop so they can make darn sure, based on the sort of visual affirmation I have observed in whatever spreadsheet or financial computing software they prefer, that their calculations are right?
I will still enjoy and use my 12cp, as I do all of my HPs, but I must admit that if I really want to work through another financial calculation like the one I just described, I will settled down on the couch with laptop and work it through in a spreadsheet.
Eager for comments. Please keep flames to a minimum--I burn easily :)