How to Calculate Your Portfolio's Return, Including Deposits

Up 54%. That’s $15,400 over $10,000. It’s also wrong, because $5,000 of the ending balance was a deposit, and a deposit is simply your own money arriving in the account, which tells you nothing at all about how well the money already there performed over the year.

Why simple return breaks

Simple return is ending value divided by starting value, minus one. It works when nothing goes in or out. The moment you add or withdraw cash, it mixes performance with contributions. Subtracting the deposit gets closer, but even that leaves a question about which balance to divide by, since the $5,000 wasn’t invested for the whole period.

Withdrawals distort it the other way. Take $3,000 out of an account and the ending balance drops by $3,000, so a simple return can show a loss in a year when every holding went up, and anyone judging their stock picks from that figure would decide they had done badly when the only thing that happened was a transfer to a checking account.

Take a simple case. You start the year with $10,000. It grows to $11,000. Then you deposit $5,000. The account now holds $16,000, and by year end it has slipped to $15,400.

Gather the cash flows and values

For either method, you need two lists. The first is every deposit and withdrawal, with its date. The second is the account value immediately before each one. Brokerage statements show both. The value on a deposit date may take some digging. Dividends and interest that stay inside the account are part of the return. Only money crossing the boundary of the account counts as a cash flow.

Time-weighted return

Time-weighted return measures how the investments performed, regardless of when you added money. Split the period at every cash flow. Find the return for each piece, then chain the pieces by multiplying their growth factors together, which strips out the effect of how much money happened to be in the account during each stretch and leaves only how the holdings themselves moved.

This is the number to compare with a fund or an index. Fund performance tables are generally reported on a time-weighted basis, so it lines up with the figures on an ETF fact sheet.

Money-weighted return

Money-weighted return, also called the internal rate of return or IRR, answers a different question: what rate did your own dollars actually earn, given when you put them in? It is the single rate that makes the starting value plus every cash flow, each grown at that rate for the time it was invested, add up to the ending value.

The two results differ for a reason. The investments gained 5.9% over the year, but you added $5,000, nearly half again what the account held, just before the weak stretch, so a bigger share of your dollars sat through the loss. That gap is what your timing cost. Had the order been reversed, with the loss first and the deposit landing just before the gain, the money-weighted figure would have come out above the time-weighted one.

Spreadsheets handle the solving for you. Most have a function that computes IRR from dated cash flows. Enter the starting value and each deposit as negatives, withdrawals as positives, and the ending value as a final positive flow.

Annualize and compare

Returns over different periods can’t be compared until they’re put on a yearly basis. Compound annual growth rate does that. Raise the cumulative growth factor to one over the number of years, then subtract one.

The CAGR calculator runs the same sum. Then pick a benchmark that matches what you hold, such as a broad index fund for a diversified stock portfolio, and use its total return, dividends included, over exactly the same dates. If your holdings overlap heavily with the benchmark fund, the comparison mostly measures fees and a few active choices, which is worth knowing; ETF overlap covers how to check.

Where the math goes wrong

Mixing the two methods is the common mistake. Time-weighted goes against a fund’s published return. Money-weighted judges your own deposit and withdrawal decisions. Using the wrong account value on a cash flow date is the next, because an end-of-day balance that already includes the deposit throws off both periods. Forgetting fees and taxes paid out of the account is another. Keep the cash flow list in one place, a spreadsheet or a trading journal. The calculation then takes minutes.