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What is the best way to calculate my portfolio's return?

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asked Jan 19, 2016 12:55 PM by
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I like calculating my personal portfolio's returns and have been using the true time weighted method, multiplying returns between successive cash flow events. One thing I've found is that because I hold both CAD and USD in my accounts is that I have to convert everything to CAD to calculate the returns. This presents a problem because the forex rate fluctuations affect the return. For example, for 2015, I had a 9% return is my RRSP, but the markets did horribly-my return only looks good because most of my assets are in USD which when converted to CAD looks pretty good. Is it better to have two different return rates, one for USD and one for CAD? I've also used the Modified Dietz method but apparently the true time weighted is the most accurate. What is the most accurate reflection of the true returns of a portfolio taking into account holding multiple currencies?

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answered Jan 20, 2016 12:08 PM by
Jin Won Choi gravatar image Administrator

Hi bmclean,

In general, I think its suffices to calculate the rate of return in terms of your spending currency. That's because a portfolio's performance should be judged based on the increase of your purchasing power.

For most Canadians, the spending currency is the Canadian dollar, so I believe it's sufficient to only calculate portfolio returns in terms of the loonie. That's why MoneyGeek's model portfolios are designed for people who spend using the Canadian dollar. If the target had been U.S. citizens, the model portfolios would have been designed differently.

I hope that answers your question.

Jin

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Perfect, thanks. Just as a follow-up, what method of calculating portfolio returns do you use? This article (below), talks about the four ways: money-weighted, linked internal, modified dietz, and true-time weighted. https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/Justin%20Bender%20Asset

bmclean ( Jan 20, 2016 12:57 PM )edit

Which calculations are you referring to? The calculation of MoneyGeek's portfolios? Or my TFSA returns?

Jin Choi ( Jan 22, 2016 01:54 PM )edit

TFSA returns

bmclean ( Jan 31, 2016 10:29 AM )edit

I actually use the simple dietz method. Note that I don't often contribute to my TFSA account, so the choice of the returns calculation method normally doesn't matter.

Jin Choi ( Feb 01, 2016 08:33 AM )edit
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