First, let's start with the basics: a return is the amount of money earned or lost on an investment. Annual returns are usually shown as a percentage on your statements. Let’s say you start the year with £100, and at the end you have £110; that would mean you have a 10% return on your money.
At Wealthsimple, we calculate your progress in three ways as each gives a slightly different picture:
i) Simple return
A simple return is a basic calculation of your net earnings divided by your net deposits. It is the easiest calculation to understand. This calculation takes all of your deposits and assumes they were added to your account on the first day the account was funded. But for example, in a case where you've earned positive returns, and then withdrawn more money than you deposited, a simple return won't accurately reflect what's going on.
ii) Time-weighted return
Time-weighted returns are the performance of a portfolio over a certain period of time. So if you started the year with £100 in your account, you didn’t touch it, and at the end of the year had £110, that would be a 10% time-weighted return. The thing is, if you make deposits and withdrawals over the year (as most of us do), a time-weighted return won't take that into account. So it's useful for comparing the performance of different investments or money managers, but it doesn't really help you understand how much money you actually made or lost.
iii) Money-weighted return
Money-weighted returns take into account any deposits and withdrawals you make and reflect the actual money you made or lost over the year. If you make a large deposit and the market goes up, it will influence your money-weighted return upwards (and vice-versa).