If you invest regularly, a simple before-and-after comparison gives the wrong answer. Money you deposited last month has not had time to grow, but a naive calculation treats it as if it had. Here is how to measure the return you actually earned.
Start with a trap
You start the year with $10,000. In July you add $5,000. At year end the account is worth $17,000. Did you earn 70%? No. Of the $7,000 increase, $5,000 was your own deposit. Your actual gain is $17,000 − $10,000 − $5,000 = $2,000.
Level one: gain on the money you put in
Divide the gain by the total contributed: $2,000 ÷ $15,000 = 13.3%. This is honest about deposits, but it still treats the $5,000 added in July as if it had been invested all year. It cannot tell you whether you earned 13.3% over twelve months or over three.
Level two: the money-weighted return
A money-weighted return (also called the internal rate of return, or XIRR in spreadsheets) finds the single annual rate that makes every deposit and withdrawal, each counted for how long it was invested, grow into today's value. Large deposits made early matter more than small ones made recently. It answers: what annual rate did my money earn, given when I put it in?
In a spreadsheet, list each cash flow with its date (deposits as negative numbers, withdrawals as positive) and finish with today's value as a positive number. Then use =XIRR(values, dates).
| Date | Cash flow |
|---|---|
| Jan 1 | −$10,000 |
| Jul 1 | −$5,000 |
| Dec 31 | +$17,000 (value today) |
That gives roughly 16% a year for these made-up numbers, higher than the 13.3% above because the $10,000 was invested for the whole year and the $5,000 for only half.
Level three: compare with a benchmark
A return means more next to a yardstick. Choose an index that matches what you own: a broad US index for US stocks, a Canadian index for Canadian stocks, a blend if you hold both. Compare over the same dates. Beating an index in one year means little; the longer the period, the more it tells you.
Things that quietly distort the answer
- Missing cash flows. Forget one deposit and the return is overstated.
- Transfers between your own accounts. Count them as money out of one and into the other, or leave them out of both, but never one without the other.
- Leaving out dividends. Include them, whether paid in cash or reinvested.
- Fees. Use the figures after fees; that is what you kept.
- Short periods. An annualised rate from a few weeks of data is not meaningful.
Nimblewit calculates this for you from your trades and cash flows across all your accounts, and shows it next to a benchmark: see how the numbers are defined or start free.