Understanding your Total Earnings

Your ‘Total Earnings’ box shows two numbers.

The large Euro number is a simple display of how much money you have made (or lost) thus far (which includes fees). It represents the amount that you could withdraw to your bank account at this moment if you wanted to.

The smaller percentage number is the performance of the portfolio itself — without taking into account the timing of your deposits of withdrawals. This is called the ‘Time Weighted Return’ (TWR) approach, and it’s the industry standard because it allows you to compare your Sagefund investments to other investments that you may have.

How your earnings may be positive but your TWR could be negative

Because you might have deposits and withdrawals on different dates, showing you a simple percentage return might not be sufficient. The example below will explain:

Let’s say Sarah made a $2,000 deposit, and her portfolio dropped by 50% so she’s left with $1,000. Then, Sarah makes a $30,000 deposit so her portfolio balance goes to $31,000. Soon after, the market rallies and her portfolio grows by 10% to become $34,100 ($31,000 + $3,100).

Overall, Sarah has $2,100 in gains for her portfolio (she lost -$1,000 then made +$3,100).

However, if you consider the actual percentage returns for each period, the portfolio was down 50%, then gained 10%. Using simple compounding according to the TWR method, her portfolio has a TWR of (((1+50%)x(1+10%))-1) = -45%. Note that because of the timing of her deposits, she has positive gains but negative TWR.

Negative earnings but positive TWR

The same dichotomy can be seen if the scenario was reversed.

First, Sarah’s $2,000 deposit grew by 50% to $3,000, then she deposited $30,000. Her new balance is now $33,000 ($2,000 + $1,000 + $30,000)

Her portfolio then lost -10% ($3,300) so she now has $29,700.

Overall, she lost -$2,300 (made $1,000 then lost $3,300).

However, her portfolio actually performed well from a daily return perspective, growing by 50%, and then dropping by 10%.

This is why we use the TWR method; it captures the real performance of your portfolio, weighting each period equally regardless of market value, eliminating the effects of deposits and withdrawals.

Why we don’t use the simple percentage return, and how it can be misleading

The simple percentage return is calculated by dividing your earnings by your net deposits.

So for example, if your net deposits are $5,000 and you earned $1,000 your percentage earnings will be:

$1,000 / $5,000 = 20%

Now let’s say you decide to go on a trip, so you withdraw $3,000, and your balance becomes $2,000.

The simple percentage return would now be

$1,000 / $2,000 = 50%

You can see why this number can be quite misleading, because technically this hypothetical portfolio did not ‘grow’ by 50%.