How is my efficiency calculated?
Within the PDT, we show the return of your portfolio. With the return, we give an indication of how your portfolio is performing. There are many different ways to calculate your return. Within the PDT we offer two options.
By default, the proven method called the Money-Weighted Rate of Return (MWRR) is selected. In addition, we also offer the Absolute method, based on the ratio between your profit or loss and historical deposits. The return break can be adjusted via your personal settings.
How does the Money-Weighted Rate of Return method work?
The Money-Weighted Rate of Return calculation method takes into account the times when you deposit and/or withdraw money. This makes it possible to select a period and view the return you achieved at that time.
Example
We look at the return for the year 2021. You deposited an amount of €500 on the first of January and bought the Shell share with it, on which you then made a profit of €50 on the 31st of December. This amounts to 10% (€500/€50).
In addition, you made a new deposit of €500 on the first of July, with which you bought the Apple share. You also made a $50 profit on this stock on the 31st of December (10%). The pressing question now is what your return is over the year 2021.
Your first intuition probably says that you made a 10% total profit because you deposited $1000 and made a profit of $100. Just try to imagine what will happen if you deposit another €1000 now. In the end you have deposited € 2000, but your profit remains € 100. This means that your return immediately drops to 5%, which of course does not feel very logical.
According to the MWRR method, it is important to observe the date of the deposits. For example, your first deposit of €500 has had the whole year to pay off, but your second deposit of €500 has only had half of the year to pay off. To take this difference into account, we have assigned weights to your deposits. The longer the deposit pays off, the heavier the weight. Exactly how the MWRR method makes these weightings is quite mathematically determined and less relevant for this explanation. But if we treat the above facts through this method, we arrive at a return of ~13.4%.
How does the Absolute method work?
The Absolute return calculation works a lot easier. It looks at your total profit or loss and compares it to your deposits without weighting them over time like the MWRR.
For example, if you have made €100 profit on a total investment of €1000, then you simply have a 10% profit regardless of when your deposits have been made. This does mean that your return will decrease with new deposits, because the total value deposited will increase. This also makes it virtually impossible to compare returns fairly with other portfolios.