How is my performance calculated?
Within PDT, we show the return of your portfolio. The return gives an indication of how your portfolio is performing. There are many different ways to calculate your return. Within PDT, we offer two options.
By default, the proven method called the Money-Weighted Rate of Return (MWRR) is selected. We also offer the Absolute method, based on the ratio between your profit or loss and your historical deposits. You choose the method under Calculation method in your portfolio settings.
We calculate your return in your base currency. If you hold securities or cash in another currency, the effect of the exchange rate is included in your return. You can read how this works in How does profit or loss on exchange rate work?
How does the Money-Weighted Rate of Return work?
The Money-Weighted Rate of Return takes into account the moments when you deposit and/or withdraw money. This makes it possible to select a period and view the return you achieved in that period.
Example
We look at the return for the year 2021. You deposited €500 on 1 January and bought Shell shares with it, on which you made a profit of €50 by 31 December. This amounts to 10% (€50/€500).
On 1 July, you made a new deposit of €500, with which you bought Apple shares. You also made a €50 profit on this stock by 31 December (10%). The question now is: what is your return for 2021?
Your first intuition probably says you made a 10% total profit, because you deposited €1000 and made a profit of €100. But imagine what happens if you deposit another €1000 now. In the end you've deposited €2000, but your profit remains €100. This means your return immediately drops to 5%, which doesn't feel very logical.
According to the MWRR, it's important to take the date of the deposits into account. Your first deposit of €500 had the whole year to generate a return, but your second deposit of €500 only had half a year. To take this difference into account, we assign weights to your deposits. The longer a deposit has been invested, the heavier its weight. Exactly how the MWRR calculates these weights is quite mathematical and less relevant for this explanation. But if we apply this method to the example above, we arrive at a return of ~13.4%.
How does the Absolute method work?
The Absolute method is a lot simpler. It looks at your profit or loss over a period and compares it to your total deposits, without weighting them over time like the MWRR.
For example, if you made €100 profit on a total investment of €1000, your profit is simply 10%, regardless of when your deposits were made. This does mean your return drops with new deposits, because the total amount deposited increases. It also makes it virtually impossible to compare returns fairly with other portfolios.