How is My Investment Doing?

2018 was a significant year for our firm as we ended a 12-year relationship with our investment dealer and transitioned to a partnership with Wealthsimple.  It was a difficult decision but none-the-less it was a necessary move to adopt a smarter and more efficient way of investing for our clients.

Simple Return (great for comparing non-financial investments)
One of the feature at Wealthsimple we loved at first sight was the Real-time Performance Reporting.  It takes the guessing out of the equation, which is exactly what every investor wants to know when they log in to their investment account.  Most people understand what Simple Return, which represents the gain as a percentage of the amount invested.  If you made $10 from your $100 investment, your Simple Return would be 10/100 = 10%

Money-Weighted Return (great for financial planning purpose)
Wealthsimple took a step further to provide Real-time Money-weighted return and Time-weighted Return.  Money-weighted return represents the return of your portfolio taking into account when you deposit and withdraw money.  For example, if you plan on investing $1,200 this year, your Money-weighted Return will be different if you deposit a lump-sum of $1,200 in the beginning of the year as opposed to $100 per month over 12 months. 

Time-Weighted Return  (great for measuring portfolio performance)
Time-weighted return represents the performance of your portfolio without taking withdrawals and deposits into account.  This is strictly a measure of the portfolio performance.  This is also the industry standard for measuring investment performance so you have a fair comparison among your investment options.

Why is it nice to have all three? 
Simple return is useful when you have another non-financial investment you want to compare with (e.g. real estate or business).  Since there is no standard in how to measure the return in these other instruments, most people will just use Simple Return for comparison.  When we build financial plan for clients, the investment return used in projections would be Money-weighted because we need to take into account when the clients make deposits and withdrawals.  Lastly, Time-weighted is used when we want to measure clients’ portfolio performance relative to others.  If a portfolio is consistently under-performing, it would be time to find an alternative.

All three measurements may provide a similar result, but understanding the differences will help you decide which one to use for your own measurement and comparison.

Clarity MD Services