Do you often check your brokerage account or mutual fund statements and wonder how they calculate your investment returns?

Are you confused by the fine print in your monthly statements?

Or maybe you just aren’t happy with the return you’re seeing getting, and you’re starting to doubt your investment strategy.

Whatever the reason, this in-depth guide to tracking portfolio performance will show you how to calculate your return on your own, so you can confidently** know how your investments are doing**.

We’ll start slowly, and by the end of the post, you’ll not only know how to figure out your investment return but also how to track your entire portfolio’s performance, regardless of how many holdings or accounts you have.

*Want to cut to the chase? Enter your info below to get your free copy of the portfolio tracker:*

In this post:

- What is an Investment Return?
- A Simple Rate of Return (+ Why It Doesn’t Work for Your Portfolio)
- The Two Ways You Could Track Your Investment Returns (and Which One You Should Use)
- Time-Weighted Returns – or I Don’t Care if I Sold at the Bottom
- That’s Great, But What About The Time-Weighted Return?
- Um, What About The Bottom?
- So Then, What’s My Time-Weighted Return?
- Money-Weighted Returns – or How’d I do for Buying at the Bottom
- How to Calculate Your Portfolio Performance So You Can Brag (or Cry) to Your Friends
- A Good Return Can Be a Bad Return Too
- A (Free) Portfolio Tracker That’ll Keep You Honest and Proud

## What is an Investment Return?

At its most basic level, an investment return is a value an investor gained or lost on their investment, typically expressed as an annual percentage.

In other words, **how much money did you make**?

To be true to your investment account, you should always consider your total return, which is the combination of capital appreciation (investment holding’s price going up) and distributions (dividends).

## A Simple Rate of Return (+ Why It Doesn’t Work for Your Portfolio)

The *simplest* way to calculate a return is to divide a net gain (or loss) by the beginning balance.

For example, your account starts January 1st with $10,000 in it. At the end of the year, it has $14,000, for a gain of $4,000.

$4,000 (net gain) divided by $10,000 (beginning balance) = .4 or 40%. This means your $10,000 had a return of 40% to get to $14,000.

This type of calculation is known as **return on investment** and only works if your original $10,000 is the only part of the story. As in, you invested the $10,000, left it there for a year and had no other contributions or withdrawals.

As you will see later, any other changes to the investment during the period you are looking at can significantly **skew the return**.

For example, what if you contributed $1,000 at the beginning of each quarter to the same investment? Now your return would be 0% since that extra $4,000 came from yourself!

## The Two Ways You *Could* Track Your Investment Returns (and Which One You **Should** Use)

So then, how *do* you correctly calculate an investment return?

As mentioned, you **need to start with the whole story**. As in finding out where you started, where you’re at, and everything that happened in between.

Then, depending on your objective, you can choose between a time-weighted return or a money-weighted return.

As you might have guessed, time-weighted returns give more consideration to **how an investment did over time**.

It **disregards cash flowing** into or out of the investment (purchasing or selling the holding).

This type of calculation helps when comparing mutual fund managers. They *can’t* control investors buying or selling units of their funds and, therefore, have to sell off holdings to pay them out. And, rightfully so, they *shouldn’t* be penalized for that.

On the other hand, the money-weighted return considers any purchases or sales of funds or holdings throughout the investment period.

A money-weighted return is then **more suited for people who are **regularly (or irregularly)** contributing** to **or selling** off their holdings.

## Time-Weighted Returns – or I Don’t Care if I Sold at the Bottom

So how do you calculate a time-weighted investment return?

In a nutshell, you need to **split your investment period into **as many** sub-periods** as you have contributions or withdrawals.

So, going back to our previous example, if you started the year with $10,000 and made four contributions, you would end up with four sub-periods.

You then need to **find each sub-period return**, link them all together, and the result is your time-weighted return!

Let’s take our example a bit further using our newfound knowledge, and let’s make it a bit more interesting using the year 2020 as the investment period.

As with before, you start the year with $10,000 in your investment account. At which point you immediately add $1000 as it’s also the beginning of the quarter.

Since you’ve been following this blog, you decided to buy into a **low-cost Canadian index fund** like TDB900.

So, on Jan 2 (because banks are closed on the 1st), you happily purchase 390.4863 units with your $11,000.

On April 1st, July 2nd, and October 1st, you contribute your quarterly $1,000 and purchase another 46.8384, 38.2555, and 36.6569, bringing your total units to 512.2371.

Date | Unit Price | Dollars Invested | Units Purchased |
---|---|---|---|

Jan 2 | $28.17 | $11,000.00 | 390.4863 |

April 1 | $21.35 | $1,000.00 | 46.8384 |

July 2 | $26.14 | $1,000.00 | 38.2555 |

Oct 1 | $27.28 | $1,000.00 | 36.6569 |

Total | $14,000.00 | 512.2371 |

Now, if you held on until December 31st of 2020, when the price of TDB900 was $28.95, your total investment would be worth $14,829.26.

## That’s Great, But What About The Time-Weighted Return?

Sorry, getting on with the calculation:

We start by splitting our investment period into **sub-periods** and finding a **simple return for each **of them.

Continuing with our example, we would have four sub-periods:

- January 2 to April 1
- April 1 to June 31
- July 2 to September Oct 1
- Oct 1 to December 31

Then we need to find the return for each sub-period.

Remember that you calculate a **basic return** is by dividing the net gain or loss at the end of a period by the balance at the beginning of a period.

So, for each sub-period:

- Find the beginning and ending prices
- Multiply them by the number of units or shares
- Figure out your net gain or loss
- Divide it by the beginning value (beginning price x units)

Sub-Period | Units Held | Price @ Beginning | Price @ End | Starting Value | Ending Value | Net Gain/Loss | Simple Return |
---|---|---|---|---|---|---|---|

Jan 2 to Apr 1 | 390.4863 | $28.17 | $21.35 | $11,000.00 | $8,336.88 | -$2,663.12 | -24.21% |

Apr 1 to Jul 2 | 437.3247 | $21.35 | $26.14 | $9,336.88 | $11,431.67 | $2,094.79 | 22.44% |

Jul 2 to Oct 1 | 475.5802 | $26.14 | $27.28 | $12,431.67 | $12,973.83 | $542.16 | 4.36% |

Oct 1 to Dec 31 | 512.2371 | $27.28 | $28.95 | $13,973.83 | $14,829.26 | $855.44 | 6.12% |

Now that you know each of your sub-period returns, you can** finish off** **the** time-weighted return **calculation** by:

- Adding 1 to each return when expressed a decimal
- Multiplying all the results together
- Subtracting 1 from the result
- Multiplying your answer by 100 to get it back to a percentage

Sub-Period | Simple Return | With 1 Added |
---|---|---|

Jan 2 to Apr 1 | -0.24 | 0.76 |

Apr 1 to Jul 2 | 0.22 | 1.22 |

Jul 2 to Oct 1 | 0.04 | 1.04 |

Oct 1 to Dec 31 | 0.06 | 1.06 |

Multiplied together | 1.0277 | |

With 1 subtracted | 0.0277 | |

As a percent | 2.77% |

And there you have your time-weighted return. 2.77%

Not bad for a year with no certainty.

## Um, What About The Bottom?

Right.

So far, you’re **disciplined enough to continue your contributions** as the world is coming to an end.

Let’s see what happens if you **panicked** when your April 1st contribution came due **and instead sold** off some of your holdings.

As with before, you start the year with $10,000 and immediately start the quarter off by adding $1,000.

Except for this time, you aren’t able to** ignore the news**, and instead of contributing on April 1st, you withdraw $1,000.

Later in the year, after some positive news in the media, you decide to pick up where you left off with your quarterly contributions.

You were lucky enough to keep your job and not take a pay cut. So, by July 2nd, you’re able to put in everything you took out back in April ($1,000), as well as the April 1st’s and July 2nd’s quarterly $1,000 contributions for a total of $3,000.

By Oct 1st, it’s business as usual, and you make your last contribution for the year.

And on December 31st, your investment would be worth $14,332.32, or $496.94 **less** than if you had just contributed every quarter.

Date | Unit Price | Dollars Invested/Removed | Units Purchased/Sold |
---|---|---|---|

Jan 2 | $28.17 | $11,000.00 | 390.4863 |

April 1 | $21.35 | -$1,000.00 | -46.8384 |

July 2 | $26.14 | $3,000.00 | 114.7666 |

Oct 1 | $27.28 | $1,000.00 | 36.6569 |

Total | $14,000.00 | 495.0714 |

## So Then, What’s My Time-Weighted Return?

As with before, we will divide our holding period into sub-periods and find each one’s simple return.

Sub-Period | Units Held | Price @ Beginning | Price @ End | Starting Vale | Ending Value | Net Gain/Loss | Simple Return |
---|---|---|---|---|---|---|---|

Jan 2 to Apr 1 | 390.4863 | $28.17 | $21.35 | $11,000.00 | $8,336.88 | -$2,663.12 | -24.21% |

Apr 1 to Jul 2 | 343.6479 | $21.35 | $26.14 | $7,336.88 | $8,982.96 | $1,646.07 | 22.44% |

Jul 2 to Oct 1 | 458.4145 | $26.14 | $27.28 | $11,982.96 | $12,505.55 | $522.59 | 4.36% |

Oct 1 to Dec 31 | 495.0714 | $27.28 | $28.95 | $13,505.55 | $14,332.32 | $826.77 | 6.12% |

Are you noticing a pattern?

Your **sub-period returns are the same** as when you contributed on April 1st.

Which, following through with the rest of the calculation, you **end up with the same time-weighted return**.

Sub-Period | Simple Return | With 1 Added |
---|---|---|

Jan 2 to Apr 1 | -0.24 | 0.76 |

Apr 1 to Jul 2 | 0.22 | 1.22 |

Jul 2 to Oct 1 | 0.04 | 1.04 |

Oct 1 to Dec 31 | 0.06 | 1.06 |

Multiplied together | 1.0277 | |

With 1 subtracted | 0.0277 | |

As a percent | 2.77% |

Therein lies the **problem** with the time-weighted return.

You contributed $14,000 for the year in both scenarios. But, when you sold some of your position when the market was down, you ended with almost $500 less.

Yet, your time-weighted return was still 2.77%.

As you can see, this type of return isn’t well suited for tracking individual investors’ portfolio performance since it ignores investor behaviour.

So then, how do you **account for investor behaviour**?

## Money-Weighted Returns – or How’d I do for Buying at the Bottom

The money-weighted investment return is your friend for emphasizing how your investor behaviour affects your portfolio.

If you buy at the bottom, you will see a boost in your return that you wouldn’t if you bought at the top (as you rightfully should).

You won’t just see how your holding performed but also **how your choice **of when to increase (or reduce) your position** affected your return**.

So how do you calculate a money-weighted return?

It’s a bit more complicated than the time-weighted return (of course), but luckily for you, I have a spreadsheet set up here that does it all for you.

All you need to do is fill in the dates and values for your starting and ending balances, and then the same for any cash flows (purchases/sales/distributions) in between.

Just make sure you enter any purchases as a negative number and any sales as a positive.

You can think of it as cash flowing out of your hands (negative) to your broker to pay for the securities and when you withdraw the cash flows back to you (positive).

So, how would our previous example look in the eyes of a money-weighted return?

We start with our typical contribution schedule:

Date | Unit Price | Dollars Invested | Units Purchased |
---|---|---|---|

Jan 2 | $28.17 | $11,000.00 | 390.4863 |

April 1 | $21.35 | $1,000.00 | 46.8384 |

July 2 | $26.14 | $1,000.00 | 38.2555 |

Oct 1 | $27.28 | $1,000.00 | 36.6569 |

Total | $14,000.00 | 512.2371 |

And populate our spreadsheet with these contributions and ending balance:

Date | Cash Flows | Action |
---|---|---|

2020-01-02 | -$11,000.00 | Beginning Balance |

2020-04-01 | -$1,000.00 | Purchase |

2020-07-02 | -$1,000.00 | Purchase |

2020-10-01 | -$1,000.00 | Purchase |

2020-12-31 | $14,829.26 | Ending Balance |

Money-Weighted Return | 6.66% |

Now that’s more like it!

2020 was certainly rough, but if you stuck to your investment plan and ignored the hysteria, you would have made out with a pretty decent return by the end of it.

But what if you hadn’t been so diligent?

Going back to our panicked scenario:

Date | Cash Flows | Action |
---|---|---|

2020-01-02 | -$11,000.00 | Beginning Balance |

2020-04-01 | $1,000.00 | Sale |

2020-07-02 | -$3,000.00 | Purchase |

2020-10-01 | -$1,000.00 | Purchase |

2020-12-31 | $14,332.32 | Ending Balance |

Money-Weighted Return | 2.78% |

Not terrible, but still less than half compared to when you stuck to contributing.

As you can see, the money-weighted rate of return is the ideal way to track your investment return as it takes into account **your behaviour** – which can sometimes contribute more to your portfolio’s gains or losses than the investment itself.

## How to Calculate Your Portfolio Performance So You Can Brag (or Cry) to Your Friends

So, how do you calculate investment returns for an **entire portfolio**?

Well, it’s not any different than calculating for a single investment.

It could **even** be a little bit **easier** since you aren’t looking at individual securities, the number of holdings or even the price of the assets.

You can even still use the spreadsheet I linked to earlier. You’ll just likely need to add a lot more rows.

The critical thing to keep in mind is, since you’re not tracking a sole investment anymore, you shouldn’t be considering individual stock purchases and sales.

You’re just going to be worried about flows of cash in (contributions) and out (withdrawals) of your investment account. In other words, you ignore the actual purchasing and selling of your securities as far as the calculation goes.

Now, moving on with our example:

Let’s pretend you’re an aggressive investor holding **five** different **stocks** to make things a little more interesting.

As usual, you start the year with $10,000 and contribute another $1,000 every quarter.

However, 1 of your stocks pays a **quarterly dividend** starting on Feb 15th, and your portfolio balance ends the year at $15,500.

The cash flows for your account could then be summarized as follows:

Date | Action | Amount |
---|---|---|

Jan 1 | Starting | -$10,000.00 |

Jan 2 | Deposit | -$1,000.00 |

February 15 | Dividend | -$40.00 |

April 1 | Deposit | -$1,000.00 |

May 15 | Dividend | -$40.00 |

July 2 | Deposit | -$1,000.00 |

Aug 15 | Dividend | -$40.00 |

Oct 1 | Deposit | -$1,000.00 |

Nov 15 | Dividend | -$40.00 |

Dec 31 | Ending | $15,500.00 |

If you entered all of these cash flows into the spreadsheet, you would end up with a money-weighted return of 10.71%.

Well done, that’s a pretty good return.

Or is it?

## A Good Return Can Be a Bad Return Too

While you would usually be happy with a 10% return, it’s important to note that investing (like everything else) doesn’t happen in a vacuum.

It’s always a good idea to **compare** your return **to a benchmark** to understand how well you *really* did.

This comparison is probably more beneficial **when your return is negative**, as it could prevent you from abandoning an otherwise sound investment strategy.

So then, what should you use for a benchmark?

It’s best if you try to find an index that most **closely resembles your portfolio**.

And by that, I mean if you are holding 100% Canadian equities, you’d want to choose an index that consists of 100% Canadian equities.

It’s okay if you can’t find an *exact* match.

What’s more important is that you choose a benchmark that resembles the investment strategy you are using and **stick with it** as long as you use that strategy.

Okay. So you’ve got a benchmark that looks close enough to your investment portfolio, now what?

You need to figure out how that index did, which you can do by revisiting our simple return formula:

(Index’s ending value) – (Index’s starting value) / (Index’s starting value)

For example, using this Yahoo chart, you can see that (according to their data) the S+P/TSX Composite Index started the year at 17,100 points and ended at 17,433.

Using our formula, we get a return of just under 2%.

So, your 10% return would’ve certainly **beaten your benchmark** if this index was representative of your portfolio.

## A (Free) Portfolio Tracker That’ll Keep You Honest *and* Proud

Want to keep all of this portfolio performance and investment return stuff organized in a neat little package?

I made you a google sheets portfolio tracker for just that.

You can store your **historical investment returns** and **compare** your **benchmark** all in one place. It even includes the money-weighted calculator and a **bonus asset allocation** tool.

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