How StashAway Calculates Returns

03 June 2019

When you log in to your account, you’ll see Total Returns. ‘Total Returns’ is the sum of all your portfolios’ returns in the currency terms you select to display.

When you view an individual portfolio, you’ll see two different return measures: time-weighted return and money-weighted return. The different figures reflect your returns with and without considering your deposit and withdrawal activities, respectively.

What is Time-weighted Return?

Time-weighted Return (TWR) is the most commonly-used way to calculate returns in the financial industry, and it's an easy metric to compare returns between different portfolios.

By tracking the portfolio’s performance from your first deposit, a portfolio’s TWR removes the distortions that various cash inflows and outflows create. In essence, TWR measures the portfolio manager’s ability to generate returns, not the effects of an individual’s deposit and withdrawal behaviours.

What is Money-weighted Return?

Money-weighted Return (MWR) assigns a weight to each of your deposits and withdrawals. So, a deposit of $1,000 SGD has a lesser effect on your portfolio’s return figure than a deposit of $100,000 SGD.

This approach helps to gauge the impact and effectiveness of an individual’s timing of deposits and withdrawals. As a result, due to the emphasis of deposits and withdrawals, MWR may naturally overweight or underweight the returns, as well as distort the performance of the portfolio manager and their investment strategy.

MWR can potentially inflate your returns if you deposit when the markets are going up, or similarly understate your performance when you deposit while the markets are going down. It will also assign a larger weight to a lump sum deposit.

MWR’s merit lies in that it clarifies the impact of the individual investor’s investment decisions (e.g., when you deposit and withdraw).

So, unless your portfolio manager determines when to deposit or withdraw funds from your portfolio, MWR doesn’t effectively measure your portfolio manager’s performance. You should only use MWR to compare two different portfolios if you have the exact same deposit and withdrawal behaviors for both portfolios.

When to use TWR versus MWR

There are merits for both measures. By considering both measures, you will have a better overall understanding of your portfolio’s performance, and of how well your deposit and withdrawal behavior affects your outcomes. If you only deposit when the markets are up, you’ll be bound to have lower returns, and this is why we so adamantly encourage dollar-cost averaging, or not timing the market. That way, you buy low and high over time, and it averages out on an upward trend.

How should you compare your StashAway returns to the returns of your other investments?

As you can see just by looking at both TWR and MWR, a single return figure doesn’t tell the whole story of how well a portfolio performs. Be sure to use the same corresponding return figure when you're comparing your returns between different portfolio managers.

But also, remember that returns are only part of the investing picture. Sure, we all invest to make more money, but how we get to our returns is just as important. Make sure you consider the level of risk your portfolio manager is undertaking when achieving those returns. In other words, look to see how much risk your portfolio manager exposes you to in the name of a return. Although the adage goes that high risk brings high returns, it's equally true that high risk brings massive losses. The more risk you take, the wider the range of potential outcomes you face. That nice high return might turn around and lose you more than you wish if you're over-exposed to risk.

In short...

  • Look at MWR to see how your deposit and withdrawal behavior affects your returns.
  • Look at TWR to see how your portfolio manager manages your investments from the first day of your investment.
  • Always consider how much risk to which your portfolio manager exposes your assets when achieving your returns.

Share this

  • linkedin
  • facebook
  • twitter
  • email

Want more?

We thought you might.

Join the hundreds of thousands of people who are taking control of their personal finances and investments with tips and market insights delivered straight to their inboxes.