Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Returns are important — and not just to people who are really bad at buying the right size clothes. Returns — or gains — on investments are the only reason that anyone invests. But there isn’t one universal way to measure returns.
Time-weighted returns are by far the most popular — the Coca Cola of measurements and the one you probably intuitively follow. Time-weighted returns simply show you the performance of a fund regardless of inflows or outflows of money into an account (a fancy financial speak way of saying account additions and subtractions). Time-weighted rate of returns are the primary way that you’re able to judge the performance of an asset manager, since an asset manager has absolutely no control over when you add or subtract money from your account.
Money-weighted returns, on the other hand, are a more accurate measure of how an asset’s rises and falls actually affect you and your investment. In the scary-looking equation used to calculate money-weighted returns, more weight is put upon returns of an asset when you have more money invested, and less when you have less invested. So for an example, if you’re invested in a fund that is stagnant for six months, then goes up 10% in the final six months of the year, your fund manager will show a better than respectable overall 10% time-weighted return for the year. But if you have $50,000 in the account for the first six months of the year, but take out half of it to buy a state of the art wine chiller before the year’s half over, your money-weighted return will be considerably lower, since you had only $25,000 in the account when it rose.
You've read about returns, now how about you (potentially) go and get some returns of your own. If that's the plan, then it's worth checking out Wealthsimple (that's us). We offer personalised investment portfolios, low fees, and friendly financial advice you might never have thought imaginable from an automated investing service. Get started investing now or find out more details.