Use this resource to review your fund’s investment performance – Money-weighted return

Definitions that may be helpful for this post

Money-weighted return – This is a measure of performance in an investment which takes into account any further investment or withdrawals that were made during a period of time.

Annual review – This is a regular review of your finances which typically should be conducted at least every 12 months to ensure that your long term financial objectives are still on track.

Benchmark – This is an average measure of performance of a specific section of investments which are similar to your own investment. This measure’s performance can then be used in comparison to your own investment performance to determine how well or bad your own investment has done.

Checking on the performance of your investments regularly can be really counterproductive for most people. It could lead to negative decisions being made and also create unnecessary stress. Why check on something that you plan on not accessing for more than 10 years? Granted it is much easier saying this here, when we start to hear in the news that the stock market is crashing it is unbelievably tempting to check in on your portfolio to see how it is doing.

However what is useful is conducting a formal review of your finances each year to ensure that your financial goals are still on track and to determine whether anything needs changing, this is known as an Annual Review. Typically this review is less about looking at investment performance and more about checking whether your personal circumstances and objectives have changed which in turn may require you to change your financial strategy. Examples of these changes could be a new salary ‘can I afford to keep investing or could I invest more?’ or a mortgage finishing ‘what can I do with this new amount of money?’

The review is there to ask yourself whether you are still comfortable with the original strategy you started with or whether you could benefit from tweaking it.

Although these reviews are very much about ensuring your circumstances have not changed and less so about the performance of your investment, you can’t help but be interested to see how your portfolio has performed each year. To help with this, I have created a spreadsheet which you are able to use to work out your money-weighted return. This measure of performance takes into account whether any further cash has either left or entered the investment throughout the year so it is useful for investors who like to regularly invest or regularly withdraw or a combination of both.

As an example, if the value of your investment was £1,000 and you regularly invest £100 each month into the portfolio AND you also wanted to withdraw £600 half way through the year AND you also have natural income (a dividend perhaps) of £50 being paid to you by your investment every 4 months THEN at the end of the year your investment is now valued at £1,400. That may seem a little complicated to actually see how your investment has done, on the surface at the start of the year your investment was £1,000 and now it is £1,400 so that is a 40% increase. When in reality, by taking into account the extra money you invested, the withdrawal you made and the natural income you received a loss of 5% was actually made.

See for yourself using the calculator below.

Follow these steps to use the calculator at your Annual Review to see how your investment has done:

  1. Enter the value of your investment 12 months ago.
  2. Enter the value of your investment now.
  3. Enter any withdrawals taken, natural income received or additional investments made into the month you actioned them.
  4. See what your money-weighted return is!

Please remember that it is all great figuring out your rate of return but you will need to compare that to the rate of return of a suitable benchmark over the same period of time to see how well you have actually done against similar investments.

I hope you find this tool useful when assessing your investments. If you have any questions please feel free to contact me.

2 thoughts on “Use this resource to review your fund’s investment performance – Money-weighted return

  1. Wow this is FANTASTIC! I don’t often have problems with checking how my investments are faring – mainly because i pay in large lump sums as it suits my finances better – and i don’t let myself withdraw.

    This is a fantastic resource to help out people who play around with their finances and find it hard to follow. Overall, I’ll be downloading and bookmarking this sheet as i want it available should it come in handy!

    You’re really providing value here and it’s thoroughly appreciated! I can’t wait to see what your blog has to offer in the long term.

    Liked by 1 person

    1. I am glad you appreciate the post! The calculator can be used for large sum investments also if you are conducting your own annual review, just add the large sum into the specific month it was invested, you can then see how that has had an effect on the overall performance of your portfolio.

      Thanks for your feedback on the blog, my aim is to use my knowledge as a financial adviser to educate people so I hope people will value this!

      Liked by 1 person

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