Suppose you invest $10,000 in an income-producing asset. At first, calculating the return is relatively simple: You take the current value of the investment + all cash distributions received − original investment = total profit or loss But the calculation becomes more complicated when you use those distributions to purchase other investments. The return generated by the original $10,000 is no longer contained in a single holding. It has begun to spread across the portfolio. The original investment may still be producing distributions, but those distributions may have purchased shares of a second investment. That second investment may then generate its own distributions, which could be used to purchase a third investment. Over time, the original capital creates a chain of assets and income streams: Original capital → distributions → new investments → additional distributions → more investments This is the income snowball. The challenge is that a brokerage account normally tracks each holding separately. It does not automatically show that part of the value in the second or third investment originated from distributions produced by the first investment. To measure the return on the original $10,000 accurately, you would need to track everything that capital eventually produced, including: The current value of the original investment; All distributions withdrawn or spent; The current value of investments purchased with those distributions; Any income generated by those new investments; and Any realized gains or losses along the way. The total return attributable to the original capital would therefore be: Current value of all connected investments + cash removed from the portfolio − additional outside capital contributed − original $10,000 Once distributions are reinvested elsewhere, the return is no longer just the performance of one security. It becomes the performance of an entire family tree of capital created by the original investment. Very few people share this level of detail one it's complicated and time consuming the closest I have seen is @perryf who broke down all his holdings if you are into income investing and you want to see the income snowball in about as much detail as you can in a long form video check out his latest video. https://www.youtube.com/watch?v=yeU3jA43Lb4&t=4748s
1,018 views
10 Comments
Perry's PIIverse@perryf · 19dEdited
This complexity that shows the snowballing of investment income reinvested which can then also produce more income or growth.... THIS IS WHAT IRR formula calculates!!! IRR is internal rate of return. Its a very complex formula vs total return... but it more accurately reflects effective investment performance. Basically IRR (calculated as an annual percentage) not only calculates total profit loss... but the pace of those returns which in theory can be reinvested faster or slower. Exactly what you are saying. If an investment can produce more income or faster.... then that income can be reinvested which also produces more return. THAT IS WHY REINVESTING EXCESS INCOME GENERATED IS SO IMPORTANT.
Kyle T@kyletfreedom58 · 19d
I love a good snowball 😊
Clantosa @clantosa · 19d
It sure does become a complicated mess when you mix it all up like that. Add having multiple accounts over different brokers and it becomes an accounting nightmare
onmargin @onmargin · 18d
The highlight for me in @perryf’s video is IRR. It is good to know. To get to that level of details, it is very complex as he pointed out. It is something that I (maybe some other folks as well) can do without honestly. Simple total return is just good enough for me, and thank you @perryf for sharing those details with us.
onmargin @onmargin · 18d
Doesn’t Wealthsimple track all that at its hierarchy? Nevertheless, keeping one or two ETFs in all accounts would simplify many things.
You must have an account to viewCreate an account for the full Blossom experience!
Join the conversation with 500,000+ other investors 💸
Create an account to get access to everything Blossom has to offer!
📊 Personalized algorithm based on your investing style, experience level and interests
📈 Powerful portfolio and dividend tracking tools
👀 See what top creators and others in the community are investing in
