The formula underpinning our portfolio tracker
Behind all the analytics tools and features our portfolio tracker offers you, there’s one governing idea:
That you can log in and see at a glance how your investment portfolio performance is really tracking.
This goes for individual holdings and your portfolio as a whole.
But, as you may know, there is a wide variety of mathematical equations and methods for determining portfolio performance.
This is why we sometimes have users contacting us to query why the performance and returns they see in their account don’t match with other sources, like their investment broker, for example.
So, allow us to explain the method we use to calculate your portfolio returns — and why.
Calculating Portfolio Performance
We calculate portfolio performance using an equation based on the Modified Dietz Method.
The Modified Dietz Method provides a dollar-weighted analysis of your return.
If you’re interested in the maths behind the method, here is the equation:
ROR = (EMV-BMV-C) / (BMV + W*C)
ROR means rate of return.
EMV means ending market value.
BMV means beginning market value.
W means weight of each cash flow.
C means cash flow.
We use a version of this equation to calculate portfolio returns.
Our calculation accounts not only for the performance of assets in your portfolio, but for the size and frequency of cash flows in and out of it, too.
The theory behind this is to give you a clearer and more complete picture of how your money is performing in the market.
Annualization
The platform also annualizes your calculated returns using the simple ‘rate of return’ methodology.
That means we weight the amount of time you’ve held an investment for by the amount you’ve invested.
For Example:
01/01/2018 Buy 1,000 Shares at $2.00 = $2000
31/12/2018 Buy 1,000 Shares at $2.20 = $2200
31/12/2019 Sell 2,000 Shares at $2.30 = $4600
Capital Gain = $4,600 – $2,200 – $2,000 = $400
Total Capital Invested = $2,000 + $2,200 = $4,200
We then calculate the Average Years Invested (AYI) by weighting the time vs the amount.
For example:
AYI = (730 days * 2,000/4,200) + (365 days * 2,200/4,200) = 538.19/365 = 1.47 years
Then, to calculate the simple annualised return:
Total Return = Gain / Total Capital / AYI = 400/4,200 / 1.47 = 6.47%
More on the different ways to annualize returns.
So…
Why Do We Calculate Your Returns Using This Method?
The simple answer to this is because the Modified Dietz Method is generally considered the most accurate way to calculate portfolio performance.
This goes for fund managers, mutual funds and investment companies looking to give their clients the clearest possible picture of how their money is performing in the market.
The financial industry seeks transparency around portfolio performance calculation and reporting.
Thus, the Modified Dietz Method has become recognized as a big step in improving portfolio performance reporting.
Not only does the financial industry like this method, but watchdogs and regulators prefer it, too.
The Investment Performance Council recommends the Modified Dietz Method in its Global Investment Performance Standards.
The way we see it, if it’s good enough for the international industry standards, it’s good enough for our users.
We hope this has helped you to understand how our portfolio tracker calculates your returns!