How does Selma calculate returns?
Selma does not only use one method to calculate your returns, but shows you different returns at different places in the service to give you the most transparent information possible.
Let’s look at the two different return calculation methods used.
Time-weighted return measures the return of investments over a given period of time. It means it shows you the return one unit makes from the start of investing until now.
It is not affected by additional investments or withdrawals on your account.
It’s great to evaluate performance on a general level.
What’s the advantage?
Time-weighted return gives a good indicator of the compound growth rate of your investment mix. And it allows you to compare the performance of your investment mix (portfolio) with others as it does not take adjustments, added money or withdrawals into account.
Money-weighted return places emphasis on “money” and measures returns by taking size and timing of additional investments or withdrawals into account.
It allows you to understand the returns of specific investment categories or funds within an investment mix.
What’s the advantage?
Many of Selma’s clients invest regularly or even monthly. Sometimes the amounts also differ month to month. The money-weighted return shows an understandable number even if you buy an investment multiple times and your investment grows.
Therefore this number is great on a holistic level, giving you a realistic picture of how your investments develop.
If you do not add money after your initial investment or take money out of your account, both returns will be the same.
Example time-weighted vs money-weighted return
When calculating returns, the different variants have their advantages and disadvantages so you always have to make a compromise to a certain extent. The advantage of the time-weighted return is that it is not influenced by deposits and withdrawals and is therefore more comparable to the market. Let's take the following example:
- You deposited CHF 10'000 and earned CHF 1'000 on it. Your return is 10%
- You deposit another CHF 10'000
- The profit generated is still CHF 1'000 but only 4.7% on the new capital of CHF 21'000. The return in % has more than halved as a result of the deposit.
- With the time-weighted return, 10% profit is still displayed
Due to the time-weighted return it can indeed sometimes look a bit "strange", namely if you first won money on a lower amount and then lost money on a higher amount, the return in Swiss francs can be negative but the percentage return can be positive be.
Where can I find which return?
- Home view
- Total gain / loss on investments view
- Investment categories on “Simple” investments view
- Investment funds on “Advanced” investments view
This number simply compares the number of all your contributions / withdrawals with the current value of your portfolio.