#### TIP

If you make additional contributions during the evaluation period
that are insignificant compared to your initial value, comparing
returns based on the initial investment alone is a reasonable
approximation. However, if you make significant contributions after
the initial one, you must take into account cash flows as described
in
later in this hack.

Because your portfolio has only an initial and ending value, you can
use the Excel `IRR` function to calculate your
return. The `IRR` function calculates the internal
rate of return for a series of cash flows that occur at regular
intervals, such as monthly or annually. To calculate the internal
rate of return for your portfolio, specify the starting balance as
the first cash flow in, enter zeros for the annual cash flows for
each year of the evaluation period, and use the positive value of the
ending balance for the final cash flow, as shown in .

#### TIP

If you want to calculate the internal rate of return for a different
period, you must specify the starting and ending values for the new
period. Type the portfolio value for the starting date of the new
period in the appropriate cell in the spreadsheet. For example, to
evaluate the return for the past five years, enter the portfolio
value for December 31, 1999 in cell B6 of the spreadsheet in . Modify the `IRR` function in
cell B13 so the parameter encompasses the new cash flow values,
B6:B11 in this case.

To compare your portfolio to an index, the easiest approach is to use
a low-cost index mutual fund. For example, the Vanguard 500 Index
Fund closely matches the return of the S&P 500 index. If
you're evaluating your portfolio over a period that
coincides with published annual returns (such as the past ten years),
you can use the published fund total return from sites such as Yahoo!
Finance, Morningstar, or MSN Money. However, if the period you want
isn't published, you can use the annual returns for
the fund to calculate the average annual return for the number of
years you want.

To find the average annual return, first calculate the cumulative
return over the number of years you want to evaluate. For any given
year, you multiply the starting value for that year by (1 +
year's return) to calculate the ending value.
Because the ending value for that year is the starting value for the
next year, the formula for the cumulative return for several years
results in .