How To Calculate Your Actual Investment Performance

Quick, do you know how much your investments earned last year? Are you certain? Well, if you relied on traditional methods to calculate your returns, you could be off, way off. The method most people use to calculate portfolio returns, regardless of the investment type, is by dividing the end value by the initial value; this method is also known as the Holding Period Return (HPR). If you deposited a lump sum, earned interest and/or dividends, and made no additional contributions or withdrawals, then using HPR is appropriate. However, if you are like most people, you make regular contributions to your savings, withdraw money for expenses, or both. In such cases, the HPR results in a less accurate evaluation of returns. The HPR is one of the simplest ways to measure performance, but is also the least accurate when there are cash flows such as additional contributions and withdrawals. When calculating performance, accuracy is critical because performance numbers are necessary to measure whether your investments have met your goals.

A more accurate way to measure performance when there are cash flows is by using the Time Weighted Return (TWR). Assume your portfolio was $100,000 on January 1st and $130,000 on January 31st of the same year and you made no additional deposits/withdrawals to your account; your holding period return would be 30 percent. However, now assume that you started the year with $100,000 in your portfolio, you made a $20,000 deposit on June 15, and the market value of your portfolio was $130,000 at the end of the year; do you know how much you made? As you can see from the table below, using the HPR, you would have calculated a 30 percent return on your portfolio. However, your actual TWR was only 7.39 percent, a significant difference.

Date Portfolio Market Value
January 1 $100,000
June 15 $115,000 Includes $20,000 contribution
December 31 $130,000
Holding Period Return (HPR) 30.00%
Time Weighted Return (TWR) 7.39%

You’re probably wondering how TWR is calculated…

The TWR calculates a return for every period there is a cash flow, each period is called a sub-period, then the TWR links those sub-periods together through a process called chain-linking (similar to taking a weighted average). Using the example above, the return for the first sub-period (January – June 15) would be negative 5 percent; the return for the second sub-period (June 15 – December 31) would be 13.04 percent. The two sub-periods are chain-linked for a return of 7.39 percent. As you can see, the TWR is a more accurate method to measure performance because it is unaffected by cash flows. The biggest disadvantage of the TWR is that the portfolio must be valued anytime there is a cash flow; this is very difficult, if not impossible, for assets that do not have daily prices available such as real estate, private equity, and individual bonds. However, for investments held in accounts that are priced daily (i.e. IRAs, 401ks, savings accounts), it is best to use TWR in order to accurately measure performance.

About the author

Ara Oghoorian, CFA, CFP®

Ara Oghoorian, CFA, CFP® is the founder and president of ACap Asset Management, Inc, a financial advisory specializing in working with medical professionals. Ara has over 20 years of experience in the financial services industry. Prior to starting ACap, Ara worked for a wealth management firm in the Washington, DC area providing investment management, tax preparation/planning, financial planning, complex risk-management strategies, and financial advice to ultra high net worth individuals and institutional clients.

Ara worked overseas for the US Department of the Treasury as an advisor to the Ministry of Finance and Economy in the Republic of Armenia. He also conducted work in the Republic of Georgia and the Republic of Latvia. He spent nine years at the Federal Reserve Bank of San Francisco auditing foreign and domestic banks and bank holding companies. He began his career at Wells Fargo Bank in Huntington Beach, CA.

Ara earned a Bachelor of Science degree in finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, and holds the Chartered Financial Analyst (CFA) designation. Ara also holds the Series 65 license.

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