How to calculate your actual investment performance

A question we’re often asked is: What is my performance? If you’re like most people and you calculate your returns by dividing your account’s end value by its initial value, a method called simple rate of return (SRR), then you could be off, way off. Using SRR may be appropriate only if you deposited a lump sum into your account and made no additional deposits or withdrawals. That’s not true for most people who tend to make additional deposits, withdrawals, or both.

Financial professionals prefer to use the time weighted return (TWR) method for assessing performance. TWR captures the performance of the underlying investments without being distorted by the timing or size of cash flows (deposits/withdrawals) in or out of your account. TWR is useful when analyzing your manager’s performance and comparing them to a competitor or a benchmark.

Assume that your portfolio was $100,000 on January 1st and $130,000 on December 31st of the same year and that you made no additional deposits/withdrawals to your account; in this case, your SRR would be 30%. Now assume that you started the year with $100,000 and then deposited $20,000 on June 15 and that your portfolio’s market value was $130,000 on December 31st. Your TWR would be 7.39%.

Date Portfolio Market Value
January 1 $100,000
June 15 $115,000 (after $20,000 deposit)
December 31 $130,000
Simple Rate of Return (SRR) 30.00%
Time Weighted Return (TWR) 7.39%

In the example above, your return from January 1 to June 15 would be -5%, and from June 15 to December 31, it would be 13.04% for a TWR of 7.39%. As you can see, TWR is a more objective way to measure your manager’s performance because it’s independent of your cash flows.

Investors may also want to see what effect their cash flows had on performance. The internal rate of return (IRR) method (sometimes called personal rate of return) takes cash inflows and outflows into account on a money-weighted basis. This method helps you determine if your portfolio is growing enough to meet your future investment goals. It’s the answer we give to clients who want to know, on an absolute basis, how much money their account has earned.

Your TWR can sometimes be negative, while your IRR is positive. This happens when your underlying investments decreased in value since you began investing, but you have continued to invest on a regular basis so that you’re able to make additional purchases when prices are lower (dollar cost averaging). On the other hand, your IRR can be negative but your TWR positive when you try to time your deposits and you end up investing when the markets are higher than they are now.

Each of these measures is appropriate in certain contexts. Understanding what each of these returns is designed to measure and how they differ will help you make better informed financial decisions. Keep that in mind the next time you take a look at your account’s performance.

Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.

Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for Azzad Ethical Fund current top 10 holdings.

Past performance does not guarantee future results.

The Azzad Ethical Fund is non-diversified and may invest a larger percentage of its assets in fewer companies exposing it to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. Stock markets and investments in individual stocks can decline significantly in response to issuer, market, economic, political, regulatory, geographical, and other conditions. Investments in mid-cap companies can be more volatile than investments in larger companies. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the stock market in general. Because the portfolio may invest substantial amount of its asset in issuers located in a single country or in a limited number of countries, it may be more volatile that a portfolio that is more geographically diversified. See the prospectus for more details about risks.

Investments in smaller and medium sized companies involve additional risks such as limited liquidity and greater volatility. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a great risk of loss to principal and interest than higher rated securities.

The Azzad Wise Capital Fund is non-diversified with a high concentration of securities in the financial sector which can expose the Fund to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. The Fund mainly invests in securities issues by foreign entities which expose the Fund to country specific risks such as market, economic, political, regulatory, geographical, and other risks. The Fund intends to invest in certain instruments that may be illiquid. As a result, if the Fund receives large amount of redemptions, the Fund may be forced to sell such illiquid investments at a significant loss to be able to meet such redemption requests. See the prospectus for more details about risks.

Related Posts

Leave A Reply

twenty − 19 =