Perhaps no number is more important to investors than the rate of return on their portfolio. Yet this seemingly simple calculation is fraught with problems. If you’ve made contributions or withdrawals during the year, calculating your rate of return is not straightforward. What’s more, there are several ways to perform the calculations: the results can differ significantly, and each method has strengths and weaknesses. No wonder so many investors have no idea how to measure or interpret their returns.
In our new white paper, Understanding Your Portfolio’s Rate of Return, Justin Bender and I introduce the various methods used to calculate a portfolio’s rate of return, explain how and why they can produce different results, and help you determine which method is most appropriate to your circumstances. Justin has also updated his popular calculators, which you can download for free on the new Calculators section of the PWL Capital website.
Time and money
Rate of return calculations fall into two general categories: time-weighted and money-weighted. If a portfolio has no cash flows (that is, the investor makes no contributions and no withdrawals), both methods produce identical figures. The key point to understand, therefore, is that any differences in reported returns come about as a result of cash inflows and outflows.
To illustrate this idea, our white paper looks at each methodology as it would apply to two hypothetical investors. We assume both have a portfolio of Canadian equities valued at $250,000 at the beginning of 2014. Investor 1 contributes an additional $25,000 on September 15, while Investor 2 withdraws $25,000 on the same date.
Our examples use actual index values to make the results more relevant. Recall that in 2014 the Canadian equity markets enjoyed strong returns during the first eight months of the year, but then experienced a significant downturn in September and October. If you made a contribution or withdrawal around the time of that downturn, how would it have affected your rate of return?
We’ve got nothing but time
A time-weighted rate of return (TWRR) attempts to eliminate the effect of cash flows into or out of the portfolio. It’s the method used by mutual funds and ETFs when preparing their published performance reports, as well as the method used for measuring the performance of my model portfolios.
In our example above, both investors would have had exactly the same TWRR, even though Investor 1 made a large contribution right before a downturn, while Investor 2 made a large withdrawal. Both investors’ time-weighted returns were also identical to that of the index their portfolios were tracking.
When a TWRR is appropriate: A true time-weighted return is ideal for measuring the performance of portfolio managers against a benchmark.
Consider an advisor working with our two hypothetical clients. Investor 1 receives a $25,000 windfall and asks the advisor to add it to his portfolio. On the same day, Investor 2 requests a $25,000 withdrawal to meet an unexpected expense. Since the portfolio manager used the same strategy for both investors, he should not be rewarded or penalized for the effect of cash flows over which he had no control.
Shortcomings of the TWRR: TWRRs are generally impossible for individual investors to calculate on their own. You’d need to know the value of your portfolio on each day a cash flow occurred, but discount brokerages typically don’t make this information available.
Many people also feel TWRRs are irrelevant to individual investors, because the timing of cash flows can have a big effect on how we perceive performance. Justin offers a dramatic example of how an investor who made a large contribution just before the financial crisis of 2008–09 could have had a TWRR over 4% even though his portfolio actually lost value.
How to measure your own TWRR: While you can’t measure your true TWRR without advanced tools, the Modified Dietz method can calculate an approximate time-weighted return if you have access to month-end values for your portfolio. Use the Modified Dietz Rate of Return Calculator on Justin’s Canadian Portfolio Manager site.
Show me the money
A money-weighted rate of return (MWRR) does not attempt to eliminate the effect of contributions and withdrawals: on the contrary, it specifically adjusts for them. For this reason it can differ substantially from the time-weighted rate of return when large cash flows occur during volatile periods.
In our example, the MWRR for Investor 1 would be significantly lower than the time-weighted rate of return because he made a large contribution prior to a period of relatively poor performance. Meanwhile, while the MWRR for Investor 2 would be significantly higher, because she made a large withdrawal prior to that downturn.
When a MWRR is appropriate: If you add or withdraw funds from your portfolio right before a big move in the markets an MWRR better reflects your personal investment experience. The Canadian Securities Administrators seem to agree: beginning in July 2016 they will require investment advisors to produce money-weighted rates of return for their clients.
Shortcomings of the MWRR: Because it is highly dependent on the timing of cash flows, the MWRR is not ideal for benchmarking portfolio managers or investment strategies. A lump-sum RRSP contribution or RRIF withdrawal, for example, can cause the portfolio’s MWRR to outperform or underperform its benchmark, which is highly misleading.
A traditional money-weighted rate of return is also calculated using an equation that can only be solved through trial and error. However, computers have made this shortcoming less important.
How to measure your own MWRR: As long as you have the starting and ending values of the portfolio and the dates of all the cash flows you can use the Money-Weighted Rate of Return Calculator on Justin’s Canadian Portfolio Manager site.
In my next blog post, I’ll use other examples to help investors better understand the important differences between time-weighted and money-weighted rates of return.
@CCP – great work once again from you and Justin. I think most people don’t appreciate how different time weighted returns can be from actual experience, particularly if one makes variable contributions.
Please correct me if I misunderstand this, but TWRR also assumes that dividends are not taxed and are completely reinvested, a situation that is only true for real investors in RRSP/TFSA, whereas MWRR accounts for this additional drag. I think that this is another significant reason to use MWRR
@William: Thanks for the comment. When a mutual fund or ETF reports its time-weighted rate of return the assumption is that all distributions are reinvested and not taxed (except for withholding taxes, which are accounted for). The reporting of after-tax returns (as is required in the US) would be useful for comparing the tax-efficiency of various funds, but the figures would not apply to any specific investor, since everyone’s tax situation is different. We discuss this issue in our previous white paper:
https://canadiancouchpotato.com/2014/09/30/after-tax-returns-on-canadian-etfs/
If you are measuring your personal rate of return in your own account, however, the dividends are all accounted for, whether they are reinvested or not. It’s very important to understand that a dividend is not a cash flow in this context, unless it is withdrawn from the account. When Justin first published his ROR calculator he got that question a lot: people were entering distributions as cash inflows as though they were contributions. So the TWRR and MWRR treat dividends in the same way.
The same idea applies if you’re a market timer who alternates between sitting in cash and investing in the markets. Unless you are actually moving that cash in and out of the investment account itself, it’s not a cash flow.
I’d be interested to see the dollar-weighted rate of return for funds based on net investor inflows and outflows. This isn’t necessarily a fair measure of portfolio managers, but the difference between the time-weighted return and the dollar-weighted return can tell an interesting story about investor behaviour at a macro level.
I’m not sure I understand the basic assumption: why is knowing your rate of return is important, especially if you’re investing for a future goal such as retirement. What would I do differently as an investor if I knew my rate of return compared with if I didn’t keep track of it?
As a long-term investor, knowing my annual rate of return doesn’t seem very useful since I can’t use it to reliably forecast anything: if my rate of return was down this year compared with last year, should I worry, adjust my targets, or shift to different investments? There’s no way to know, because everything could change next year. It seems like the only rate of return that truly matters is the final, overall rate of return when I start exchanging those shares for dollars in retirement. And by then it’s too late to do anything about it.
I have never tracked the rate of return on my retirement investments and wasn’t planning to, because I can’t see how I could use that information. But I must be missing something important, because it seems a lot of investors care deeply about rate of return and track it for all of their investments.
@Michael: As you probably know, Dalbar does this analysis in its annual Quantitative Analysis of Investor Behavior report. Their methodology has received some criticism, but I think it’s fair to say that, in general, investors’ money-weighted returns underperform the time-weighted returns of the funds, and this is largely because people chase performance.
http://www.qaib.com/public/about.aspx
http://www.highviewfin.com/blog/does-dalbar-really-calculate-investor-returns/
@CCP: I’ve seen the Dalbar figures for the mutual fund industry as a whole. I’d be interested to see the data fund by fund. Maybe Dalbar does that too but I haven’t looked at their data in detail.
@CCP:
Would it be a ridiculous idea to invest only once a year on january first, to make rate of return calculations easier?
@Jas: Yes, I think so. :)
@Brad : I am of the same mind. It’s interesting to know the rate of return I am making/losing, but really doesn’t matter as I’m not going to change my strategy much. I’m investing for retirement too.
@Brad: Calculating your rate of return is most important for those who invest actively through market timing, stock selection, or some other attempts to beat the index. Many investors delude themselves into thinking they’re beating the index, but almost all lose to the index on average over many years.
@Brad and Pacific: I suppose it depends on the subtleties. If you have a carefully thought-out investment plan and you’re confident that your asset allocation and fund choices are appropriate, then sure, you don’t need to dwell on your calendar year returns. But surely it make sense to compare your returns to a benchmark from time to time? If you have a balanced portfolio and it underperformed or outperformed a model ETF portfolio with a similar asset mix, aren’t you interested in knowing why?
This is obviously important for any strategy that deviates from a plain-vanilla: for example, if you’re targeting dividend stocks, or using sector ETFs, or making tactical shifts, shouldn’t you actually measure whether these moves added value? And even if you’re purely passive, isn’t it worth knowing whether trading commissions or other costs detracted significantly from your returns?
Interesting article. I assume the rates of return that are displayed on Questrade’s (and all brokers for that sake) monthly statements are time-weighted rates of return?
@Martin: I would not assume that: they are more likely to be money-weighted returns:
https://community.questrade.com/b/iqnews/archive/2013/10/18/how-are-you-doing-your-account-tracking-and-performance-tools-are-getting-a-major-overhaul.aspx
To me it’s not a big thing to do. Saving and keeping portfolio in balance invested in the lowest cost index funds on the market is all that I can control, returns are out of my control.
I’m essentially like Jake and Brad: I can’t control returns, I can only control my strategy.
Then again, I don’t need to justify my strategy to myself or anyone else, so that probably changes things.
I can see that for someone trying market timing or who thinks they can pick winners better than the pros can, it would be important to do the math to see if they actually are beating the indexes. ie, my “laissez-faire” attitude can be justified but for some others it could be a massive blind spot.
Given the amount of correspondence I get from readers about the performance of hypothetical portfolios (both my models and others) I have to admit I’m surprised how many people seem utterly uninterested in the returns they are actually getting. Must be two very different groups of readers.
Measuring your personal rate of return doesn’t mean you think you can control market movements, or that you are trying to beat the indexes. Just because you are an index investor does not mean you are actually getting market returns. There are many factors that can cause a drag: sitting on too much cash, paying to much in fees and trading commissions, failing to rebalance, misguided attempts to time your purchases, and so on. Many DIY investors assume they are executing their strategy perfectly, but how could they know that if they never measure their performance?
If you work with an advisor using an index strategy, would you allow him or her to say he wasn’t going to bother sending performance reports because he can’t control the markets? I hope not.
@ CCP:
>> “Just because you are an index investor does not mean you are actually getting market returns. There are many factors that can cause a drag:”
True, but all these factors are directly observable and remediable without going through the time and effort of calculating a personal rate of return.
Honestly asking oneself a few questions covers the bases: Am I using low cost index funds (relative to alternatives) – and are my funds tracking their indices appropriately? Am I paying low trading commissions (relative to alternatives)? Am I following a preset contribution and rebalancing schedule for all transactions, and only sitting on cash between those dates? Am I rebalancing in all market conditions, according to my preset plan?
If the answer to all these is yes, then you’re executing your strategy as well as you can, and knowing your personal rate of return will not change anything. And if any answers are negative, then the problems and appropriate remedies are obvious even without knowing it.
In 15 years as a DIY indexer I’ve never bothered to calculate my precise personal rate of return. On rare occasions when I want to get a very general ballpark figure, using the weighted average return of the funds we hold over the relevant period (weighted by our asset allocation), is a close enough proxy that literally takes a few seconds.
@Steve: Just curious whether you would accept this kind of informal self-assessment from an advisor. We use a disciplined passive strategy with our full-service clients at PWL Capital, for example. Do you think it would be acceptable to simply tell our clients that we’re doing everything right, or do you think it would be reasonable for them to insist we actually demonstrate this by preparing regular performance reports? Do you think it would be reasonable to send them the time-weighted returns of the funds they held rather than their personal rates of return? I hope investors would expect more than that.
@ CCP:
I’ve never used an advisor and have no intention of ever doing so. My comment that calculating a personal rate of return was unnecessary concerned DIY investors and was in response to your (possibly rhetorical) question: “Many DIY investors assume they are executing their strategy perfectly, but how could they know that if they never measure their performance?”
When you bring in advisors you introduce an agency problem, and therefore the need for oversight and verification, that does not exist for DIY investors (at least does not exist in a way that calculating a personal rate of return does anything about). Whether receiving a personal rate of return from one’s advisor materially improves that oversight and verification – more than simply checking that the advisor is executing the investment plan precisely as agreed, for example by reviewing all transactions – is a question I’ll leave to those who actually use advisors.
I fail to understand why many of you simply do not care about the kind of return that your portfolio is delivering. Of course, knowing your rate of return from year to year doesn’t mean that you should not stick to your strategy or alter it drastically, yet it seems to me that it is good to at least have a rough idea of the type of performance it is giving you. Simply in terms of planning it is good information to have at hand. For someone who wishes to retire earlier than at age 60, for example, a 3 % difference in your yearly rate of return could make a big difference over the long run.
With a more or less specific financial goal in mind, it seems to me that it is good to keep track of how your passive income strategy is performing.
I suspect the people who don’t care about their returns cover a wide range. There are those who are completely indexed with only a few inflows and they have checked that their index ETFs have low tracking error. These people have already effectively checked that they are getting close to benchmark returns. At the other extreme there are those who want to think their market moves are making them money and don’t want the cold hard truth to hit them in the face. Personally, even though I’m now fully indexed with Vanguard ETFs, I prefer to compute my returns just to make sure I haven’t missed anything.
I can see both sides of the argument. In fact I find it to have become a little bit of a paradox.
When I first started “investing”, I never calculated my return. I was doing all kinds of stuff wrong, basically everything one could imagine (high cost funds, buying individual stocks because I thought I could pick them, trusting advisors). I had no idea what my returns were, and still do not, except to presume they were horrible.
Then, and with the help of sites like these and others, I got religion. I moved to a passive strategy and started calculating my rates of return in great detail. Today I calculate a dollar-weighted and time-weighted rate of return for my portfolio, so I can see/analyze both, and for every reason described here (to make sure my funds are performing well, that my costs are manageable, and that I am not making any other mistakes). I can tell you my return using either method for any period that I have been doing this within seconds right now. So I completely believe in the importance of having the information and performing the exercise.
Yet the paradox (and I think Steve’s point) is that the more that I have been doing this, the less I find myself caring/needing it, for exactly the reasons Steve says. I know my funds are low-cost. I know there’s little tracking error (courtesy of provider sites and sites like this). I know I’m not overspending on commissions and that I’m not trying to time the market with purchases.
So I will continue to calculate a rate of return, but I confess that at this point I’d doing it more on principle and because I’m an information junkie, than because it actually informs any decision.
Aren’t brokers obliged now to provide rates of return? I don’t need to calculate mine, as Questrade provides it on each statement.
I can see the point of not seeing the big need of knowing one’s portfolio rate of return if one adheres to a strict passive strategy like CCP given that they can just check the indexes’ return instead. Either way, my point is that it is good to keep an eye on performance measures now and then to make sure your on the right way towards reaching your goals.
@Martin: Discount brokerages are not obligated to provide rates of return. For a long time RBC Direct was the only one that did it: in the last few years others have started to add the feature, including Questrade, National Bank and a few others.
“…completely indexed with only a few inflows and they have checked that their index ETFs have low tracking error. These people have already effectively checked that they are getting close to benchmark returns.”
That’s basically me, though I have a few holdover individual stocks that I see bouncing up and down for no reason I can fathom, and that reminds me to what extent I can’t pick stocks if ever I’m tempted to read up on those junior mining startups or some other very specific investment.
As to Martin’s comment about wanting to be able to make projections – that’s why I really want to see CCP’s return calculations, they’ll give me a pretty good idea of what to expect, and I expect his numbers will be more reliable than mine, which for the most part will be the same CCP’s with some behavioral mistakes that throw in a random tracking error.
Thanks Dan,
Great article. I really appreciate the information. The calculators on the PWL website are great and I have been using them as well as the Boglehead calculator which has both methods as I am both learning and curious. I was also surprised by the comments. I agree there must be a broad range of readers. I think people can get very “religious” about their own perspective and when you don’t work with other people, as you do, you can lose sight of the diversity that comes with that; hence the the strong comments.
I appreciate the calculators – it takes me 2 minutes a month to take the information from my RBC Direct statement (month end balance, and inflows, rarely outflows) and I have both a TWRR and a MWRR. I appreciate that information. At the beginning of the year before these articles were out and I was not aware of Justin’s calculators I spent hours one day trying to figure this all out and find a calculator to use – they are not so easy to come by…
It’s all much appreciated. Thanks again!
@kulvir: Thanks for the comment. Justin and I appreciate you taking the time to say that you found the calculators useful.
Another excellent article. It’s good to understand the impact of cash flows on my individual money weighted rate of return, vs. time weighted. Thanks.
I enjoy golf a lot more since I stopped keeping score. But I am not depending on my golf results to fund my retirement, and I don’t have a retirement plan that incorporates assumptions about my golf scores to ensure adequate funds later in life. So I do track my investment returns and if they are lower than the assumption in my financial plan over a number of years I will know that I need to make some adjustments.
I use the PWL calculators, and the Bogleheads return spreadsheet. The Boglehead one tracks monthly cash flows, not daily, but gives return numbers similar to the PWL calculators. Note an updated version was released this week for anyone using it.
I also benchmark my results against Couch Potato, Mawer and Steadyhand funds, but that’s more of an exercise for interest sake. If I am achieving the return on which my financial plan is based, with a low maintenance indexed portfolio I am happy.
@Steve: Actually, that was not my point. Of course, past results cannot be used as a sure indicator to future ones. What I am saying is that if you have a goal in mind of accumulating 1 M$ in your bank account by age 45, for example, and only after 10 years of investing in your portfolio you decide to take a look at your portfolio’s yearly rate of return and notice that it has been of only 2%, well you probably should start asking yourself questions as to why.
Good article. I learned long ago that invest requires good financial tracking.
Maybe I am old-school, but I track my finances (including investments) with a Balance Sheet that I update each month. From that I can derive Monthly Income Statements, MWRR and whatever else I want to track.
While a rate or return is useful, the key measure I track for my overall finances is whether my net assets (after all expenses) is out pacing inflation.
I’ve tried a number of methods, but in the end I found a simple spreadsheet with assets and liabilities as rows and each month of the year as columns was sufficient.
The other thing I have is one spreadsheet for each asset I buy/sell, so I can track purchases/sales, adjusted cost bases, exchange rates and capital gains/loss. They are easy to maintain and this makes taxes much easier to do. Also, should I ever get audited, I’ll have this all organized which should help.
One final thought, I am considering also tracking exchange rate and updating my Balance Sheet to include a version that reports in US Dollars. I am convinced of the need to track my portfolio performance in US Dollars because it better captures a measure of purchasing power. This year, my portfolio is up in CAD because I bet on US dollars but it’s really a false number in my opinion.
Personalized rates of return are problematic. Money weighted rate of return is really the old IRR (Internal Rate of Return) calculation. This method does not work particularly well for cash flows as the model assumes a reinvestment rate for each cash flow. Additionally, swings between positive and negative cash flows will generate two or more empirically correct rates of return. Which one of the multiple RORs do you pick?!
Money weighted ROR is not the international standard – time weighted ROR is.
What happens when CRM2 requirements for personalized ROR reports kick in in 2016? All Dealers will be obliged to give all clients their personalized RORs ( money-weighted).
Therefore you will swamped with all kinds of RORs. Some statements may have both MWROR and TWROR, plus the fund company ROR(TWROR?) plus the dealer inception ROR(MWROR) plus possibly the benchmark ROR.
ROR is a whole new minefield, best treated -carefully.
I think many of the comments are because it’s been very well re-enforced in us that the idea of a Couch Potato is that it’s a very hands-off, laissez-faire portfolio. (Also, thankfully, a pretty simple financial concept to grasp once you understand the fundamentals.) I also don’t check rate of return ever. I chose the TD eSeries Balanced CCP, DCA the money in every paycheque, rebalance at the end of June and December if it’s off, and wait with baited breath for the annual report cards to be posted here to get a ballpark idea of how things panned out. Under no circumstance would I then try and compare my own rate of return from a logical plan against another benchmark. …Because I wouldn’t switch paths anyway.
However, If I sat down and found out that my portfolio was significantly below the report card posted here, of that the TD funds were dragging year-over-year behind the other model portfolios, I’d have to do ask some serious questions.
All that said, as @CCP states, if it was a non-self directed investment scenario where I was using an advisor, I would certainly want to know the numbers.
I’m wondering how reliable is the rate of return published by discount brokerages. I’m currently using TD Direct Investing and under the “Performance” tab, I can get my rate of return for a certain period (1 month, 3 month, YTD or custom). Do you know what method they use? Do they take into account my contributions, dividends and interests or do they simply track the NAV of my holdings ?
@Wealth Advisor: You’ve actually touched on the issue that prompted the white paper in the first place. Many advisors are currently using time-weighted returns in their performance reports, but soon they will be required to use money-weighted returns. If investor are comparing their returns to an index benchmark (which is always time-weighted) they may wrongly conclude that their advisor is outperforming or underperforming. That’s why it’s important to understand the differences. The good nes is that large portfolios with modest cash flows should not be meaningfully affected: both methods will produce similar results. But those with smaller portfolios who are making relatively large contributions or withdrawals will certainly notice a difference between their time-weighted and money-weighted results.
@Edward: I did a MoneySense column about this a while back: I worry that some people have taken the “lazy investor” idea too literally. Just because an investor uses a passive strategy does not mean they should completely disengage from the process. When we did the white paper on tracking your adjusted cost base we heard from many readers who felt this was too much work for “hands-off investors,” for example. I’m not sure CRA would agree, but there you go. If you are making automated contributions to a portfolio that includes nothing but e-Series funds you probably don’t need to worry too much about tracking your rate of return: it’s not likely to vary significantly from the TWRRs I report annually. But if you use ETFs there is likely to be much more variability in returns, so it’s worth comparing your personal results to the benchmark occasionally to make sure your behavior isn’t causing a drag on performance.
@Maxim: I would check with TD Direct, but they likely use money-weighted returns. Either way, as long as you are not removing the dividends and interest from the account (which would be a cash flow) they will be included in the calculations, whether it’s TWRR or MWRR.
@Maxim: TD Direct performance numbers are Time Weighted Rate of Return. Click the Help link in the upper right of the performance page and a pop-up window with detailed explanation of the calculation method will open.
@BruceMcK: Many thanks for pointing this out. This is interesting, because Questrade seems to use MWRR. So if you had accounts at both brokerages you could get different results from the same portfolio. All the more reason to make sure you understand the difference between the two methodologies, and to find out which one your brokerage uses.
@CCP: Happy to assist. If you would like, I can copy all the info from TD DIrect’s performance help page and email it to you. It goes into considerable detail and provides the formula they use for geometrically linking daily performance results.
@BruceMcK: Many thanks, that would be great.
I find these detailed rate of return calculations to be more of a beginner’s concern. Once your portfolio gets reasonably large relative to your annual contributions, a series of regular monthly inflows doesn’t actually impact your overall performance numbers in any significant way. You can get close enough by benchmarking your allocation’s performance once a year on January 1st.
That being said, there is an interesting Canadian startup that recently received funding that aims to automate these performance calculations though across aggregated portfolios from multiple brokers. I’m not sure how close they are to having a releasable product though.
@ CCP:
>> “Just because an investor uses a passive strategy does not mean they should completely disengage from the process.”
Absolutely agree and worth reminding people … but what does that have to do with calculating personal rates of return?
>> “When we did the white paper on tracking your adjusted cost base we heard from many readers who felt this was too much work for “hands-off investors,” for example.”
Calculating ACB is a legally mandated requirement in our tax system that every investor using unregistered accounts is obligated to deal with. Calculating personal rates of return is none of those things. Apples and oranges.
>> “But if you use ETFs … it’s worth comparing your personal results to the benchmark occasionally to make sure your behavior isn’t causing a drag on performance.”
It may be fun to do so, much like solving sudoku puzzles is fun for some people – but it will have just as little value for your investing as sudoku puzzles do:
If you’ve set up a predefined contribution and rebalancing schedule, and you stick strictly to it in all conditions, then *by definition* your behaviour is not affecting investment performance in any way – you are getting *exactly* the performance you should expect to get with your plan.
So if all costs have been minimized as part of your investment plan, and your rebalancing schedule is reasonable based on best practice, then any further variability between between personal results and your benchmark will be random and can be ignored, because of having no predictive value at all.
And if you don’t have a plan or don’t strictly follow it, the issue is not a theoretical “drag on performance”, it is much more basic – you need to make a plan and follow it, or accept that DIY passive investing may not be for you and find another method.
Dear Dan
RBC Direct Investing uses the Modified Dietz Method to provide an approximation of the performance of your portfolio over time.
Using the Performance Tab allows for an investor to compare their portfolios against a number of benchmarks including the TSX as well as a number of model portfolios.
What do other online banking/investment services offer and are these measures of performance accurate?
@Buy High: From the comments here it seems that different brokerages use different methods. And unfortunately some continue to offer no performance reporting at all.
My feel has been that as long as I stick with the Canadian Couch Potato model portfolios or at least the ETFs recommended in them, then I shouldn’t have to worry about tracking error: if there’s significant tracking error in those ETFs you probably wouldn’t be recommending them anymore. That puts the onus on you (Dan), of course, to periodically revisit your recommended portfolio(s), but you do that anyway.
If I were assembling my own portfolio then sure I would want to track my rate of return and compare against the index or indices being tracked. But as long as I have some assurance that the CCP model portfolios have been assembled with ETFs that do a good job of tracking their index, I’m not too concerned about tracking error.
The bogleheads spreadsheet seems to have this functionality as well (calculating both types of returns) and it’s available as a Google spreadsheet. http://www.bogleheads.org/wiki/Calculating_personal_returns
Does anyone compare their portfolios to the FPX Indicies?
This is kind of an adjunct to this. If we are trying to determine our average cost base and at the end of the year we get our tax statements. Can we just enter the total return of capital to figure out our cost base or do we need to add them line by line? I want to do this before I figure our my returns…thx as usual
@Bruce: I’m afraid I don’t understand the question. Rates of return and cost base are unrelated calculations.
This Rate of Return Calculator is fantastic. Is there a way to add more rows for additional contributions/withdrawals?
@Kendall: Glad you’ve found the calculator useful. The Modified Dietz spreadsheet is set up for as many as five cash flows per month (which might be useful if you make weekly contributions, for example). It’s hard to imagine a situation when that would not be adequate, but if you have more than five in a month you could group two of them together. For example, $100 on July 15 and $200 on July 17 could be entered as $300 on one of those two days. The difference in the reported rate of return would be negligible.
I found your post and the white paper extremely helpful. However, I assume its not possible to calculate a mutual fund using one of the three methods, is it?