How does Clover calculate my returns?
It’s a lovely spring day and because you’re in a good mood you login to your Clover dashboard to see your money at work. After giving a whoop of joy you decide to double-check these returns…and something seems off. Why are your calculations different from what you’re being shown? What’s going on?
It has to do with how we calculate returns. We’ve decided to re-post an excellent explanation on how we calculate your fees. WARNING — some maths are involved here but we promise to keep it simple.
Simple calculation vs. modified Dietz method
Most people will determine a return using a simple calculation. For example, an account with a $10,000 initial investment and $5,000 of additional deposits added over five months is shown like this:
This formula calculates the return as 6.33%. Now, this is a pretty basic way to calculate investment returns and it works well if you’re talking about a single investment with no further contributions. But it’s less accurate when you make regular contributions because it doesn’t take into account when your money was invested.
Since many of our clients make regular contributions into their Clover accounts to take advantage of compound interest , we use a different calculation that considers when these contributions are invested. It’s called the modified Dietz method and includes the size and timing of all contributions. It’s super sexy and looks like this:
We’ll assume that you’re not a maths nerd, so we’ll skip the detailed explanation. Just know that when you plug in the same values from before, the return is now shown as 7.64%
In this example, the return calculated using the modified Dietz method is higher than the return calculated using the simple calculation. But this isn’t always the case. The return from the modified Dietz method could be higher or lower than the simple calculation’s return — it depends on the additional contributions. We use the modified Dietz method because we believe it’s a more accurate representation of your portfolio’s true investment return.
So there you have it. Now you can say the answer lies in the Dietz! (We love our cross-linguistic puns).
Not a Clover customer? Get your free customised investment plan. 🍀
Already a customer? Refer a friend and get $5,000 in assets managed for free for life! 🍀
