Understanding Your Portfolio’s Rate of Return

October 28, 2016

When you review your investments, you probably have two key questions: How are my investments doing? And how much are they costing me? The rate of return provided on your quarterly statements shows the profit or loss generated by investments themselves over a period of time, expressed as a percentage.

Typically, a rate of return is measured in one of two ways: time-weighted or money-weighted.

Time-weighted rate of return

This measurement answers the question: What is the rate of return on my investments?

A time-weighted rate of return (TWROR) calculation excludes an investor’s individual activities (deposits or withdrawals) and measures the investment’s average return over a time period or a series of time periods. In other words, it measures what the investment manager has accomplished with the money you invested.

This measurement is useful if you want to:

  • Measure the return on your investment
  • Compare an investment to a benchmark—for example, a mutual fund against a market index like the S&P or TSX

Money-weighted rate of return  

This measurement answers the question: What is the rate of return on my money?

A money-weighted rate of return (MWROR) calculation considers all cash flows in and out of a specific investment, when those inflows and outflows took place, and all fees paid related to the investment. If you make money during a specific time period, the return will be positive; if you lose money, the return will be negative. This type of return reporting is often more relevant to an investor because it provides a more accurate representation of how his or her investment or portfolio has actually performed.

This method is useful if you want to:

  • Track the progress of your personal financial plan
  • Understand how your individual transactions have impacted your investment’s performance or your ability to meet your goals

Compare the results 

Example:

In year one, you invest $5,000 and earn 10%. In year two, you invest an additional $5,000 but lose 8% at the end of the year. At the end of year two, your total investment is $9,660 (that is, down $340).

Time-weighted approach return: 1.2%. This tells you how the manager did, disregarding the impact of the deposit made in year two.

Money-weighted approach return: -2.3%. This tells you how your money actually performed, based on cash flows in and out of your account.

We’re committed to presenting investment information clearly and concisely

At MD Financial Management, we want our clients to have confidence in their investment strategy, and to know that their portfolio reflects their financial goals. We’re introducing an annual Investment Performance Report for MD Management Limited (MDM) and MD Private Investment Counsel (MDPIC) clients in compliance with regulators’ new disclosure requirements.

Using the money-weighted approach, this report will outline how your investments have performed since December 31 of the previous year(s), after costs have been deducted. The information provided in the report will help you understand whether your investments have gone up or down, and whether you are on track to meet your investment goals.  

While MD has traditionally used the time-weighted approach to calculate your rate of return, the money-weighted approach has been adopted as the industry standard for performance calculations. The money-weighted approach more accurately reflects the activity in your account.

Changes coming to your statements

Consistent with MD’s new Investment Performance Report, MDM and MDPIC clients will see money-weighted calculations on their statements in 2017. If you’d like to see your rate of return using a time-weighted calculation, your MD Advisor can provide you with that information or you can access it via My MD

Advice and guidance from MD

Your rate of return is an important tool for measuring your financial progress, and it’s part of the advice and guidance you can expect from your MD Advisor. Our MD Advisors and team of experts can provide you with advice and a comprehensive financial plan for every stage of your career—from medical school to practice and through retirement.

If you’d like to know more about how your rate of return is calculated, about the new Investment Performance Report, or about the changes to your statements, contact your MD Advisor

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