How are my returns and performance metrics calculated?
A return is the amount of money earned or lost on an investment. If you began the year with $100 in your account and ended the year with $110, that shows a 10% return. Investors use these figures to assess how well their money has been working for them or to compare investment opportunities.
But it gets a little more complicated when you factor in deposits and withdrawals. For example, if your money earned 0% and the extra $10 was a deposit you made, that's not actually a return. To account for those issues, there are a few different ways to calculate returns and other performance metrics:
They all have different levels of complexity and accuracy and are helpful in different scenarios.
Understanding different performance metrics
Learn about the different performance metrics available in your self-directed account and view examples below:
Simple rate of return (SRR)
This is an intuitive, transparent way to see how much money your money has made by comparing what you currently have to the net amount you've deposited over time. It accounts for how long you've been invested, the timing of your deposits and withdrawals, and what you chose to buy.
Simple returns are calculated by subtracting your net deposits from your account balance, and dividing that number by your net deposits.
Here's an example:
Let's say you opened an account in January with $100, then withdrew $10 a couple months later. When you check your balance at the end of the year, it's $105.
SRR = (balance - net deposits)/net deposits or ($105 - $90)/$90 = 16.7%
We calculate the returns on your home screen and account pages using the following calculation:
Dollar Earnings ($) = (Change in Account Value - Change in Net Deposits)
Rate of Return (%) = (Change in Account Value - Change in Net Deposits) / (Starting Account Value + Change in Net Deposits)
If you start with $10,000 in your account. Over 3 months, you deposit $3,000 and withdraw $1,000, your change in net deposits is $2,000. By the end of the period, your account grows to $13,500, so the change in account value is $3,500. Now, applying the formulas:
- Dollar Earnings ($)
$3,500 - $2,000 = $1,500 - Rate of Return (%)
($3,500 - $2,000) / ($10,000 + $2,000) = $1,500 / $12,000 = 12.5%
SSR limitations
SRR is useful for thinking about whether your investing strategy has been working for you. But it isn't that helpful when you want to compare the performance of one investment to another, since most investments are quoted with the assumption that all of the money is put in at the beginning of the year, and not many people invest that way. For an apples-to-apples comparison, you need a calculation that attempts to remove the influence of deposits and withdrawals from the return.
Unrealized returns
Unrealized returns (also called unrealized profit and loss, or open profit and loss) represent the change in value of investments you still hold. These gains or losses only exist "on paper" until you sell the investment.
How are they calculated?
Unrealized Return ($) = Current market value - Book cost
Unrealized Return (%) = (Current market value - Book cost) / Book cost × 100%
If you purchase 10 shares of XYZ at $50 per share ($500 total book cost) and today they're worth $60 per share ($600 total), you have:
- Unrealized Return ($): $600 - $500 = $100
- Unrealized Return (%): ($600 - $500) / $500 × 100% = 20%
This means your investment has grown 20% in value, but you haven't actually "realized" this gain yet because you haven't sold the shares.
Historical dividends
Historical dividends are payments distributed by companies to their shareholders from their earnings. Dividends are typically paid into your account as cash, but there are instances where a company will issue stock instead of cash.
How are they calculated?
Total Historical Dividends = Sum of all dividends received over the specified time period
If you own 100 shares of XYZ that pay quarterly dividends of $0.50 per share:
- Quarterly dividend payment: 100 shares × $0.50 = $50
- Annual dividends: $50 × 4 quarters = $200
Your historical dividends within Investing insights show all these payments received over time, allowing you to track this income stream separately from price fluctuations.
How to view your performance metrics
You'll see the easiest metric, simple returns, on your main self-directed account view. You can view the rest of the performance metrics in your investing insights:
- Unrealized returns
- Historical dividends
Comments
0 comments
Article is closed for comments.