When we invest our funds in an investment or savings plan what we are interested in is whether our funds will increase in value within the time horizon we have set. We also want to know how much our money has 'worked' when compared with the benchmark.
Return is therefore defined as the quantification of profits or losses as a percentage of the initial invested capital. However, we believe that the growth rate of a portfolio is a fairer way of comparison between portfolios or between a portfolio and a stock market index acting as a benchmark.
The performance of a portfolio is directly affected by market volatility, but is also linked to the asset classes selected to create the portfolio. The way the funds are distributed between the multiple asset classes depends on various factors such as the tolerance of each investor to any fluctuations, the purposes of the investment (eg income, capital appreciation, etc).
The growth rate or return of an investment is given by dividing the difference between the final and the initial investment amount by the initial investment amount. Final investment amount is the amount that our portfolio has reached after a pre-determined period of time that.
Things are getting more complicated for the calculation when the investor has made inflows or outflows at the portfolio. We should note that such cash flows are solely deposits or withdrawals and they do not relate to profits, losses, dividends, coupons, or fees that are either charged or credited within the portfolio.
At XSpot Wealth, we always use the Time Weighted Return Method (TWR) as our calculation method, to avoid any misleading results, using the individual returns (Holding Period Returns - HPRs) calculated for each of the time intervals between successive capital inflows/ outflows.
Let’s suppose we have the following values of a portfolio and the respective inflows/outflows:
|Date||Ending Value||Cash Flow|
The calculation will take part for every sub-period. Any sub- period is determined by two successive cashflows.
HPR1= (21,773- 20,300)/ 20,300= 7.26%
HPR2= [23,937- (21,773+ 500)]/ (21,773+ 500) = 7.47%
The rest HPRs are calculated the same way and are respectively: -6.6%, 8.62% και 3.89%.
Then, performing the TWR method, which is a geometric sequence, we get the following result:
(1+ 7.26%) * (1+ 7.47%) * (1- 6.6%) * (1+ 8.62) * (1+ 3.89%) – 1= 21.49%
*1 is added to every HPR to simplify the calculation when there are negative returns on the portfolio. It is subtracted at the end to complete the TWR method.
In case someone followed the simplified method we mentioned in the beginning, a result of 28.04% would be generated, which is higher but misleadingly as it doesn’t adjust for capital inflows, outflows and time .
At XSpot Wealth we want your goals for your invested money to be fulfilled. We make that happen using advanced technology, exceptional management and up to date analysis, offering you the actual returns of the chosen and personally suitable investment plan while applying the lowest costs.
Please remember that past performance is not a reliable indicator of future performance
This document does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.