How to Calculate Your Portfolio’s Rate of Return

Starting in July 2016, dealers and advisors will be required to provide a personal rate of return to their clients. Although this disclosure is a step in the right direction, it will likely lead to more confusion and frustration amongst clients and advisors if the results are not properly explained. There are various ways to calculate a rate of return – and each of them can add to your understanding of how your portfolio is doing. In my next series of blog posts, I will explain some of the most popular rate of return methodologies, and also provide some easy to use calculators for those investors who prefer to get their hands a little dirty.

To illustrate the impact that a chosen return methodology can have on a portfolio’s reported performance, we will compare two investors who invest $250,000 on December 31, 2013 into an index fund that tracks the MSCI Canada IMI Index. We will assume that neither investor pays any product fees, and that the security tracks the index perfectly (Note: I have used actual index values in my examples in order to make the results more relevant).

After a period of relatively good performance, Investor 1 decides to contribute an additional $25,000 to their portfolio on September 15, 2014. Investor 2 decides that they would like to take some profits off the table, and instead withdraws $25,000 from their portfolio on September 15, 2014.

In the charts below, the month-end market values for 2014 are included for both investors. The dates and amounts of any contributions (positive external cash flows) and withdrawals (negative external cash flows), have also been included (as well as the new market values after the cash flow occurs).

Throughout the examples, you will need to continually refer back to these charts, so keep them handy as you work through each calculation.

For the next blog post, we will examine the time-weighted rate of return (TWRR).

Chart 1: Investor 1 – $25,000 Contribution

Date	Market Value (MV)	Cash Flow (CF)	MV _{After Cash Flow}
December 31, 2013	250,000
January 31, 2014	251,938
February 28, 2014	262,212
March 31, 2014	265,256
April 30, 2014	271,900
May 31, 2014	270,962
June 30, 2014	282,868
July 31, 2014	287,098
August 31, 2014	293,108
September 15, 2014	290,621	+ 25,000	315,621
September 30, 2014	304,818
October 31, 2014	297,125
November 30, 2014	299,406
December 31, 2014	298,082

Chart 2: Investor 2 – $25,000 Withdrawal

Date	Market Value (MV)	Cash Flow (CF)	MV _{After Cash Flow}
December 31, 2013	250,000
January 31, 2014	251,938
February 28, 2014	262,212
March 31, 2014	265,256
April 30, 2014	271,900
May 31, 2014	270,962
June 30, 2014	282,868
July 31, 2014	287,098
August 31, 2014	293,108
September 15, 2014	290,621	– 25,000	265,621
September 30, 2014	256,530
October 31, 2014	250,055
November 30, 2014	251,975
December 31, 2014	250,860

Justin Bender
CFA, CFP, B.Comm., Portfolio Manager

With more than a decade of experience managing portfolios, Justin is focused on keeping costs and taxes low for his clients. His skills as an analyst and researcher have made him widely respected in the ETF industry.

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