When looking at your investments on the portals, its important to remember:
- Returns do vary with market changes.
- The average return is just that, an average of the highs and lows.
Please refer to our blog The Average Market Return.
- Investing is like planting trees – you don’t keep pulling the tree out of the ground to check how the roots are going.
Please read our blog its Time in the Markets not Timing the Markets.
On the Consilium/FNZ wrap platform under the ‘Change in Performance’ widget, click ‘view performance’, next to the date you can change the settings.
The default performance calculation is the Internal Rate of Return. There is also the option to use Time Weighted Return. The most commonly quoted method is Time Weighted Returns by fund managers.
Internal Rate of Return (IRR) vs Time Weighted Return (TWR)
IRR takes into account the impact of cash into and out of the portfolio. TWR does not take this into account .
To demonstrate the difference here is an example:
- On 1st April 2020 an investor invests $1,000 to buy 1,000 units of Share A. Price is $1.00 per share.
- On 1st April 2021 the investor buys another 1,000 units of Share A but the share price is now $2.00 per share. Total cost $2,000.
- On 1st April 2022 the investor sold their entire holding of 2,000 units of Share A after the price fell to $1.25. The investor receives $2,500.
The investor paid a total of $3,000 for 2,000 units of Share A, but on selling them received $2,500. In this scenario over a space of 2 years the investor lost $500.
Using the TWR method the calculation breaks the return into two one year segments and averages the return from each segment.
Internal Rate of Return (IRR): -12.8%pa
Time Weighted Return (TWR): 11.8%pa (compound return)
Despite the investor losing $500 on the portfolio, the time-weighted return was positive. This is because the time-weighted return is only measuring the underlying performance of the shares held in the portfolio and not the actions of the investor buying into or out of those shares (inflows and outflows) or the impact of the size of those actions over the period being measured.
The argument is Share A actually performed well over this two year period going from $1.00 per share to $1.25 per share.
If you are interested in the details on how the calculations are done refer to: