Let’s look at the different return numbers that you can find e.g. in your mobile app's Nerdy Stats. 🤓
CHF earnings
This is your total gain or loss in CHF.
How is it calculated?
CHF earnings = Current value (EOD) - Deposits + Withdrawals
Simple return
Simple return calculates the total percentage gain or loss of your investment since the beginning.
Suppose you invested CHF 10'000, and, today, your investment is worth CHF 12'000. Your simple return would be 20% because your investment grew by CHF 2'000 – it is a straightforward calculation of investment performance. The downside is that it doesn’t take into account the timing of additional deposits or withdrawals, which means it may not represent the performance accurately.
How is it calculated?
Simple Return = (Current End Value − Deposits + Withdrawals) / (Deposits - Withdrawals) × 100
Time-weighted return
Time-weighted return (TWR) is slightly more complex. It measures how your investment has performed over multiple periods, with each deposit or withdrawal marking the start of a new calculation period.
The goal of TWR is to measure the performance of the investment product itself, regardless of when money was paid in or taken out. It is not affected by deposits, withdrawals or adjustments, which makes it a great way to evaluate performance on a general level. It allows you to compare the performance of your investment portfolio with others.
How is it calculated?
TWR = (1 + R1) × (1 + R2) × … × (1 + Rn) − 1
R1 (Sub-period Return 1) = (Beginning Value of the Period + Cash Flow) / (End Value of the Period − Cash Flow)
Because time-weighted return does not take deposits into account, you might encounter a situation where your overall CHF earnings are negative while your TWR % remains positive.
This can occur, for example, when you initially earned profits on a smaller investment, followed by a larger deposit, and then experienced negative market movements.
Money-weighted return
Money-weighted return, also known as IRR, focuses on "money" in measuring returns, considering the size and timing of investments or withdrawals. It is particularly useful when deposits and withdrawals are irregular, giving you insight into your personal rate of return. It provides an overall view of your investment's development, even if you buy multiple times during a period.
If you don't deposit or withdraw funds after the initial investment, the money-weighted and time-weighted returns will match.
Case study: Comparing simple return, time-weighted return and money-weighted return
When evaluating returns, each method, with its own pros and cons, can be more or less helpful.
Let's illustrate this with an example.
Imagine the following situation:
You started with investing CHF 10'000 and earned CHF 1'000 within the first year. Your return is 10%.
At the beginning of Year 2, you deposit another CHF 10'000.
During Year 2, you gain an additional 5% (CHF 1'050). Your investment is now worth CHF 22'050 and your total profit is CHF 2'050.
Different performance metrics and their calculations:
Simple return: The generated profit is CHF 2'050, which translates into a simple return of 10,25%.
(22'050-20'000)/20'000*100 = 10,25%
Time-weighted return: The generated profit is still CHF 2'050, but the overall growth rate is 15,5%. It tells you what the performance of the underlying investment product was without timing your deposit.
TWR = (1+0.10)×(1+0.05)−1 = 1.155−1 = 0.155 or 15.5%
Money-weighted return: The profit generated is still CHF 2'050, but the return is only 6.68%. Compared to the other methods, the return is significantly lower. This is due to the timing of the deposits and the different growth levels over the 2 years.
R = 6,68%
Where can I find which return?
📱Mobile app:
Under the "Portfolios" tab, in the "Nerdy stats" section, you'll find the CHF earnings, simple return and time-weighted return.
The performance metric used for the different categories and various ETFs is the money-weighted return.
💻 Web-app:
Under "Investments" - "My Planet", you'll find the CHF earnings.
The percentage is calculated using the time-weighted return metric.
The performance metric used for the different categories and various ETFs is the money-weighted return.