Value versus return
Portfolio value is what everything is worth right now. Investment return is how much of that value came from growth rather than from your own contributions.
The basic relationship
Current value = money you put in − money you took out + investment return
A rising value line can mean your investments are doing well, or simply that you keep adding money. A falling line can mean losses, or that you withdrew cash. Both lines tell a true story — just not the same story.
Contributions and withdrawals
| Investor A | Investor B | |
|---|---|---|
| Starting value | $40,000 | $40,000 |
| Added during the year | $0 | $20,000 |
| Ending value | $55,000 | $55,000 |
| Investment return | +$15,000 | −$5,000 |
Both portfolios end at $55,000. Investor A's investments earned $15,000. Investor B's lost $5,000, hidden by new money. Any performance measure worth using has to account for cash moving in and out.
Realised and unrealised
Part of your return may already be locked in through sales (realised), and part may exist only on paper in holdings you still own (unrealised). Both count towards how your investments have done; only the realised part is fixed. The Cost Basis guide explains the calculation.
Percentages need a base
A percentage return is only meaningful if you know what it is a percentage of. "Up 20%" on a holding you bought last month is very different from 20% over five years. When contributions arrive at different times, simple percentages become harder to interpret, because money added recently has had less time to grow or shrink.
Professional reporting uses specific methods to deal with this, such as time-weighted returns (which strip out the effect of cash-flow timing) and money-weighted returns (which reflect it). They answer slightly different questions. For most personal investors, the key habit is simply to check whether a figure includes contributions or not.
Time periods change the story
The same portfolio can look excellent over one year and poor over three months. Short periods are dominated by noise; long periods include more of the ups and downs. Comparing a one-week movement to your long-term plan is rarely helpful. Looking at several periods together gives a more balanced picture.
Currency effects
If you hold overseas assets, part of your return comes from exchange rates. A US share that rises 10% in US dollars may show a 5% or 15% gain in Australian dollars depending on how the currency moved. Neither figure is wrong; they answer different questions. Reporting everything in your home currency shows the result that matters to your spending power, as long as historical purchases are converted at the rates of the time.
Why a portfolio can lag its best holdings
It is common to see one holding up 60% and wonder why the portfolio is only up 8%. A few reasons:
- Weighting. A strong performer that is 5% of the portfolio adds only a little to the total.
- Timing. You may have bought most of a holding after its big rise.
- Other holdings. Losses elsewhere offset the gains.
- Cash. Money sitting in cash earns little while markets rise.
- Contributions. New money added recently has not had time to grow.
Portfolio performance is the weighted result of everything, at the times you held it. That is exactly why it is worth measuring separately from the performance of individual holdings.
Incomplete information
If some holdings have an unknown cost, their return cannot be calculated. Treating that cost as zero would show the whole value as profit and badly overstate performance. An honest report excludes those holdings from return calculations and tells you that it has done so.
What past performance does not tell you
Performance describes what happened. It does not predict what will happen next. A strong year does not make another strong year more likely, and a weak one does not make a recovery certain.
How Compndr presents performance
Compndr separates portfolio value from investment return. Its Performance History chart shows how your total value has changed over time, while return figures compare current value with what you paid. Foreign holdings are converted using current exchange rates for today's value and historical rates for past dates. Holdings with an unknown cost are kept out of return figures rather than counted as pure profit. The How it works page explains the difference between the value line and profit in more detail.
If you add money regularly, Dollar Cost Averaging shows how steady contributions shape both your value and your average cost.