# How To Calculate Your Actual Investment Performance

Quick, do you know how much your investments earned last year? Are you certain? Well, if you relied on traditional methods to calculate your returns, you could be off, way off. The method most people use to calculate portfolio returns, regardless of the investment type, is by dividing the end value by the initial value; this method is also known as the Holding Period Return (HPR). If you deposited a lump sum, earned interest and/or dividends, and made no additional contributions or withdrawals, then using HPR is appropriate. However, if you are like most people, you make regular contributions to your savings, withdraw money for expenses, or both. In such cases, the HPR results in a less accurate evaluation of returns. The HPR is one of the simplest ways to measure performance, but is also the least accurate when there are cash flows such as additional contributions and withdrawals. When calculating performance, accuracy is critical because performance numbers are necessary to measure whether your investments have met your goals.

 Date Portfolio Market Value January 1 \$100,000 June 15 \$115,000 Includes \$20,000 contribution December 31 \$130,000 Holding Period Return (HPR) 30.00% Time Weighted Return (TWR) 7.39%

You’re probably wondering how TWR is calculated…

The TWR calculates a return for every period there is a cash flow, each period is called a sub-period, then the TWR links those sub-periods together through a process called chain-linking (similar to taking a weighted average). Using the example above, the return for the first sub-period (January – June 15) would be negative 5 percent; the return for the second sub-period (June 15 – December 31) would be 13.04 percent. The two sub-periods are chain-linked for a return of 7.39 percent. As you can see, the TWR is a more accurate method to measure performance because it is unaffected by cash flows. The biggest disadvantage of the TWR is that the portfolio must be valued anytime there is a cash flow; this is very difficult, if not impossible, for assets that do not have daily prices available such as real estate, private equity, and individual bonds. However, for investments held in accounts that are priced daily (i.e. IRAs, 401ks, savings accounts), it is best to use TWR in order to accurately measure performance.