Betterment calculates a time-weighted return in the Summary and Performance pages of your account. Because our customers are generally buy-and-hold investors making multiple deposits into their accounts over time—or retirees making multiple withdrawals— this is by far the most intuitive way to measure, compare, and judge the performance of a Betterment account.

There are other ways to calculate returns, and this guide will provide you with an understanding of each method: simple, money-weighted, and time-weighted. Below, we have an interactive calculator which you can use to get comfortable with the different calculations.

Time-Weighted Return

A time-weighted return can be thought of as the simple return on the initial balance of an investment account over a certain period, because it compounds the simple returns between deposits and withdrawals so neither their timing nor size distort the percentage return. Common indices, such as the S&P 500, are reported in time-weighted returns.

If you have an investment account for which you, the investor, control the cash flows into and out of the portfolio, and you want to judge the performance of the portfolio without the distortion introduced by your cash flow timing, you should use a time-weighted return. For that reason, it is the only method you should use to compare the performance of different investments or of a single investment against a benchmark, making it the industry standard return methodology for financial advisors.

Money-Weighted Return

If you have an investment account where the investment manager controls the cash flows into and out of the portfolio and you want to judge their overall performance, including their timing, then you should use a money-weighted return. You would do the same if you were attempting to time the market yourself and wanted to check your performance.

The math gets more complicated here, but the concept is simple: When there is more money in the account, its performance is given more weight than when there is less. That way, a manager who has a lot of your money invested when your portfolio is appreciating, and then only a little when it is depreciating, will have that good timing (or good luck!) reflected in a money-weighted return.

If you or your investment manager do not engage in market timing, then this is not a useful measure of performance because it will tend to overweight or underweight different periods of returns for reasons that are unrelated to the execution of the strategy.

Simple Return

The return on an investment is most simply defined as the amount you gained as a percentage of the amount you invested. The simple return is a good back-of-the-envelope calculation that works perfectly when you’ve only made a single investment, but in most common circumstances will not be a good judge of the growth of your portfolio.

If you invested $100,000 in a Betterment account today, and after a year you have $110,000, you can safely describe your return as 10%.

But, consider what happens if you were to invest an additional $400,000 at the end of that year. Using the same calculation, you’d now find your simple return to be 2%. Did your investment performance suddenly drop by 8%? Thankfully, no. That is the limitation of a simple return—it treats all of the deposits into an investment account as having happened at the same time as the first deposit.

Below is our interactive calculator which you can use to calculate each of these returns given different deposits at a few different points over the last 10 years.

Return Comparison Calculator

Change the deposit amounts and see how different returns calculations change