Overview
Your portfolio performance and return come from two sources:
- Price appreciation/depreciation of a security, and
- Any dividend or interest income generated by a security.
The two in combination are also known as your total return, and this is the single return number that's typically shown to you.
Your portfolio's long-term returns will depend on the risk level of the portfolio. Generally speaking, over the long term, taking more risk equates to higher returns.
Performance and Return
While knowing the performance and return of your investment portfolio is absolutely critical, how performance and return are calculated is not as straightforward as you may think. In fact, there are three different ways to calculate your portfolio performance and return - each has its own unique calculation methodology and is useful in different situations:
- Simple Rate of Return
- Time-Weighted Rate of Return (TWRR)
- Money-Weighted Rate of Return (MWRR)
All returns are calculated daily, meaning you are able to see performance in your account at the end of every business day, as well as in your monthly statements, and the data points displayed in the app show cumulative performance since inception (or the date that you have specified).
Simple Rate of Return
The Simple Rate of Return is the easiest to calculate and understand. It compares the current value of your portfolio with the total amount that you initially invested.
The Simple Rate of Return is calculated by taking the current market value of your portfolio (which accounts for any gains/losses) and dividing by the total amount of your initial investment (book value).
Time-Weighted Rate of Return (TWRR)
Time-Weighted Rate of Return (TWRR) is an objective measure of your portfolio’s performance over a specific period of time. TWRR ignores the effects of timing and size of cash flow from contributions and withdrawals in or out of your portfolio, which gives you an objective assessment of how well your investments have performed over time.
TWRR is useful for making an apples-to-apples comparison of your portfolio’s performance against another portfolio, investment fund, or market index as a benchmark.
The exact formula for calculating Time-Weighted Rate of Return is as follows:
Money-Weighted Rate of Return (MWRR)
Money-Weighted Rate of Return (MWRR) tells you how well you as an investor have fared over time, taking into account both the performance of your investment portfolio as well as the timing and size of any deposits or withdrawals you have made.
Your MWRR is unique to your portfolio, since it specifically accounts for your activity. Therefore, MWRR cannot be used to make comparisons between different investment products as your activity may differ from another investor’s activity. For example, two investors who are invested in the same model portfolio will always have the same Time-Weighted Rate of Return, but the investor that makes regular contributions to their portfolio will have a higher Money-Weighted Rate of Return as markets tend to trend upwards over time.
The exact formula for calculating Money-Weighted Rate of Return is as follows:
Still have questions? We encourage you to contact your advisor to start the conversation and learn more!