What are simple earnings?

Your simple earning is simply the ratio of the earnings in your account to your net deposits. Earnings include market changes (in either a positive or negative direction), dividends, and fees. Your net deposits are your deposits minus your withdrawals over a given time frame.

Simple Earnings = Earnings ÷ Net Deposits

Because your simple earning is easy to calculate, we know it can be tempting to use it to judge your portfolio’s performance—but in fact, it can be quite misleading. When you see simple earnings, I want you to think, “This is like when I was a kid and my mom asked me if I’d brushed my teeth, and I said yes, which was technically true, but only because I brushed my teeth yesterday. It was technically not dishonest, but also did not address the heart of the question at hand.” That is similar to simple earnings. It’s a real number, we’re not making it up, and it’s not technically inaccurate (whatever “inaccurate” means). But it also probably does not really address the question you were trying to answer in the first place.

Here’s an example to illustrate why simple earnings can be misleading:

You deposit $10,000. Then you earn $2,000. Wow!

Simple Earnings = Earnings ÷ Net Deposits

$2,000/$10,000 = 0.2 = 20%

Your simple earnings is now 20%. That sounds really good!

Now, you decide to withdraw it all. Maybe you want to buy a course to further your education. Or, you intend to pay four months’ worth of your child’s New York City day care costs. Perhaps you’d like to buy three-fourths of a 2018 Toyota Camry. Whatever the reason, you withdraw all $12,000.

What are your simple earnings now?

Simple Earnings = Earnings ÷ Net Deposits

$2,000/($10,000-$12,000) = $2,000/-$2,000 = -1 = -100%

Your simple earnings are now negative, even though your actual earnings were the same. This is because the simple earnings calculation is easily distorted by cash flows—especially withdrawals.

Simple earnings is the only returns figure that most people can easily calculate on their own, and it gives some people peace of mind to be able to fully understand and calculate at least one of their returns figures themselves. Calculating other types of returns would require a ton of backend data on market changes, dividend payment history, and cash flows in your particular accounts—not to mention the right software and code to compile this data correctly. Because the other return types are so difficult to calculate, we suggest letting our algorithms do the work for you.

In previous Betterment history, we considered removing simple earnings from the Performance section completely, because of how easily it can be distorted and cause confusion. But, customers pushed back. They felt we were taking information away from them. We want to be transparent, so we left it. But we want you to understand it doesn’t mean you have clean teeth.