How is my performance calculated?

Within PDT, we show the return of your portfolio. With this return, we give an indication of how your portfolio is performing. There are many different ways to calculate your return. Within PDT, we offer multiple methods.

By default, the proven method called Money-Weighted Rate of Return (MWRR) is selected. In addition, we also offer the Time-Weighted Rate of Return (TWRR) method, the Simple method, and the Absolute method. The return calculation can be adjusted via your personal settings.

How does the Money-Weighted Rate of Return method work?

The Money-Weighted Rate of Return calculation method takes into account the times when you deposit and/or withdraw money. This makes it possible to select a period and view the return you achieved at that time.

Example

We look at the return for the year 2021. You deposited an amount of €500 on the first of January and bought the Shell share with it, on which you then made a profit of €50 on the 31st of December. This amounts to 10% (€50/€500).

In addition, you made a new deposit of €500 on the first of July, with which you bought the Apple share. You also made a €50 profit on this stock on the 31st of December (10%). The pressing question now is what your return is over the year 2021.

Your first intuition probably says that you made a 10% total profit because you deposited €1000 and made a profit of €100. Just try to imagine what will happen if you deposit another €1000 now. In the end, you have deposited €2000, but your profit remains €100. This means that your return immediately drops to 5%, which of course does not feel very logical.

According to the MWRR method, it is important to observe the date of the deposits. For example, your first deposit of €500 has had the whole year to pay off, but your second deposit of €500 has only had half of the year to pay off. To take this difference into account, we have assigned weights to your deposits. The longer the deposit pays off, the heavier the weight. Exactly how the MWRR method makes these weightings is quite mathematically determined and less relevant for this explanation. But if we treat the above facts through this method, we arrive at a return of ~13.4%.

How does the Time-Weighted Rate of Return method work?

The Time-Weighted Rate of Return method (TWRR) splits the selected period into smaller sub-periods and calculates the return for each sub-period. Those sub-period returns are then compounded into one total return.

The goal of TWRR is to neutralize deposits and withdrawals as much as possible. A deposit does not count as return, and a withdrawal does not count as a loss. This makes TWRR especially useful when you want to compare your portfolio's performance with a benchmark or another portfolio, because the result is less influenced by when you added or withdrew money.

Example

Suppose two retail investors both start with €10,000. Cash flows are processed at the end of each quarter, after that quarter's return has been measured.

Portfolio A

• Start: €10,000
• After quarter 1: €11,000 (+10%), followed by a €4,000 deposit.
• After quarter 2: €15,300 (+2%), followed by a €2,000 withdrawal.
• After quarter 3: €13,965 (+5%), followed by a €2,000 deposit.
• End of year: €16,763 (+5%).

Portfolio A's TWRR is: (1.10 x 1.02 x 1.05 x 1.05) - 1 = 23.7%.

Portfolio B

• Start: €10,000
• After quarter 1: €10,500 (+5%), followed by a €500 deposit.
• After quarter 2: €12,100 (+10%), followed by a €500 deposit.
• After quarter 3: €13,860 (+10%), followed by a €1,000 withdrawal.
• End of year: €14,146 (+10%).

Portfolio B's TWRR is: (1.05 x 1.10 x 1.10 x 1.10) - 1 = 39.8%.

Portfolio A ends with a higher value, mainly because more net cash was added. TWRR shows that Portfolio B performed better across the sub-periods, because the method filters deposits and withdrawals out of the return calculation.

How does the Simple method work?

The Simple method looks at the change in your portfolio value within the selected period, adjusts it for net deposits and withdrawals, and compares the result with the portfolio value at the start of the period.

The calculation is: (ending value - starting value - net deposits/withdrawals) / starting value. This means a deposit does not directly count as profit, and a withdrawal does not directly count as a loss. However, the method does not time-weight cash flows like MWRR does. Large deposits or withdrawals during the period can therefore still influence the result.

Example

If you start with a portfolio of €1000, deposit a net €500 during the period, and end with €1650, your Simple return is 15%: (€1650 - €1000 - €500) / €1000.

How does the Absolute method work?

The Absolute return calculation works a lot easier. It looks at your period profit or loss and compares it to your total deposits without weighting them over time like MWRR does.

Example

You have deposited a total of €1000 and your portfolio has made €100 profit. The Absolute method divides the profit by your total deposits: €100 / €1000 = 10%. It does not matter whether you deposited that €1000 all at once or spread it out over the period.

This does mean that your return will decrease with new deposits, because the total value deposited will increase. This also makes it virtually impossible to compare returns fairly with other portfolios.