Educational Articles / Published on .

How is the rate of return on your investments determined?

There are two ways to determine the performance of an investment portfolio.

IF YOU WANT TO COMPARE THE RATES OF RETURN OF DIFFERENT FUNDS AGAINST EACH OTHER OR AGAINST THE INDICES


Use the time-weighted rate of return (TWRR)

Because it takes into account:

  • the gains realized by the fund
  • the income realized by the fund
 

 

IF YOU WANT TO FIGURE OUT YOUR OWN RATE OF RETURN OVER DIFFERENT PERIODS OF TIME

 Use the money-weighted rate of return, or personalized rate of return (PRR)

Because it also takes into account the moment and the amount of:
 
  • your deposits
  • your withdrawals
     

How each rate of return is calculated

 

For example

Suppose that at the beginning of the year, Investor A and Investor B each have $10,000 invested in the same mutual fund. Let’s now imagine this scenario:

FUND PERFORMANCE

   

 

What Investors A and B did during the year

 

 

 Investor A

 

 Investor B

Value at the beginning  $10,000  $10,000
Q1  No deposit or withdrawal No deposit or withdrawal
Q2  No deposit or withdrawal No deposit or withdrawal
Q3 New deposit or withdrawal of $ 5,000 No deposit or withdrawal
Q4  Aucun dépôt ni retrait No deposit or withdrawal
 Value at at the end $16,068 $10,818

 

 

Results

The Fund    
      
 Investor A    
      
 Investor B    
     

 

The personal rate of return (PRR) of Investor B is the same as the fund’s rate of return (TWRR) because he or she made no transactions during the year.

The personal rate of return (PRR) of Investor A is higher because he or she made a purchase just before a quarter that offered a strong, positive return.

 

 

To sum it all up

If You Make NO transactions

Before a period of positive performance
Your PRR will be identical to the time-weighted rate of return

Before a period of negative performance
Your PRR will be identical to the time-weighted rate of return

if you buy units

Before a period of positive performance
Your PRR will generally be higher than the time-weighted rate of return

Before a period of negative performance
Your PRR will generally be lower than the time-weighted rate of return

If you sell units

Before a period of positive performance
Your PRR will generally be lower than the time-weighted rate of return

Before a period of negative performance
Your PRR will generally be higher than the time-weighted rate of return

KEEP IN MIND


Since December 31, 2016, the money-weighted rate of return, or PRR, is used by the investment industry to display your personalized rate of return on your portfolio statement and on your annual Report on Investment Performance.

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