Portfolio return

Portfolio return is the percentage change in the value of your investments over a period. It sounds simple, yet one portfolio can show a 10% simple return, a 20% MWR and a 15% TWR at the same time, and each number is correct, because each answers a different question.

Types of return

• Simple return: total gain ÷ net deposits. Fine for a portfolio without top-ups, misleading with regular deposits.
• MWR (money-weighted): accounts for the amount and date of each deposit and shows the investor’s experience.
• TWR (time-weighted): removes the effect of deposits and withdrawals and shows the result of the investments alone.

Cumulative or annualized

Any return can be shown in two ways. If an investment grows from 100,000 to 121,000 in exactly two years with no deposits or withdrawals, the cumulative return is 21% and the annual return is 10%, because 1.10 × 1.10 − 1 = 0.21.

The annualized rate lets you compare investments held for different lengths of time, but it can mislead for periods shorter than a year: 10% in a month is more than 200% a year once annualized.

Real return

The nominal return ignores inflation. The real return shows how much your purchasing power actually grew: (1 + nominal return) ÷ (1 + inflation) − 1. With an 8% gain and 5% inflation, the real return is about 2.9%, not 3%.

Currency matters too: a return in your home currency combines the assets’ result in their own currency with the change in the exchange rate.