When you log in to your Betterment account to review your returns, you’ll see two growth metrics: Earnings percentage and time-weighted return (TWR).

Some investors have asked, “If the market is going up, why is my earnings percentage so much lower than its TWR?”

The answer lies in what both figures actually measure. While earnings percentage provides a simple look at how much your account has changed in value, TWR tells you how it has performed over time, regardless of deposits or withdrawals.

Because Betterment’s clients are long term investors, over time we would expect to see a higher TWR than earnings percentage; it means you’ve been a disciplined saver.

You may then wonder, what’s the difference between the two? Below, we explain so you can have a better understanding about what they actually represent and what it means to see a higher TWR than earnings percentage in your account.

Returns in Your Betterment Account

Let’s first refer to a sample “Safety Net” account. After logging in, you can expand your account to see both earnings and TWR percentages under “Lifetime Returns.”

Hypothetical Safety Net Account


Again, the account’s earnings percentage (3.6%) provides a simple look at how much your account has changed in value, while its TWR (14.5%) tells you how your investments have performed over time, without being skewed by deposits or withdrawals.

Now, let’s define the two concepts and show how they’re calculated. Then, we’ll compare them, with a deeper look into what both metrics aim to measure, and how they combine to form a powerful indicator of investment performance.

Earnings Percentage Defined

Earnings percentage looks at how much your account has increased or decreased from its starting point, including the impact of any withdrawals, deposits, or portfolio allocation changes you’ve made.

How It’s Calculated

To calculate earnings percentage, first take the difference between a new and former value, then divide it by its former value, and multiply by 100:

\(\frac{New\ Value\ – \ Original\ Value}{Original\ Value} \times  100 = Earnings\ Percentage

To calculate your account’s earnings percentage, we can replace the variables with investment account-related terms:

\(\frac{Current\ Value\ of\ Account\ – \ Net\ Deposits}{Net\ Deposits} \times  100 = Earnings \ Percentage

For example, let’s say you have an account balance of $1,000 that grows to $1,200. Your earnings percentage is 20%, which means that your account grew by 20%:

\(\frac{$1,200\  -\   $1,000}{$1,000} \times  100 = 20\%

Now, let’s shake things up a bit. This time, you deposit $1,000, which grows to $1,200 during the year. Then, you receive an annual bonus of $10,000 from your employer and it hits your Betterment account on Dec. 31, the last day of the year.

Let’s say the market was flat on Dec. 31, so the $10,000 deposit doesn’t change in value.

What do your annual earnings look like in this scenario? Let’s calculate the earnings percentage again.

\(\frac{$11,200 \ – \ ($1,000\  +\  $10,000)}{ $1,000 \ + \ $10,000} \times 100 = 1.8\%\)

If you only look at earnings percentage, you might say that the portfolio in the first example (20%) outperformed the portfolio in the second example (1.8%). But we know that’s not necessarily the case, because earnings percentage took into account the bonus cash inflow.

Now, consider another twist. Just as in the previous scenarios, you deposit $1,000 into your account at the beginning of the year and your portfolio goes up 20% for the year. But this time, you want to buy a plane ticket for a vacation, so you withdraw $800 from your Betterment account on Dec. 31. What do your annual earnings look like in this scenario?

\(\frac {$400 \ – \ ($1,000\  -\  $800)}{$1,000 \ – \ $800}\times 100 = 100\% \)

A 100% return is pretty good, right? Of the three scenarios, it would appear the third example delivered the best results.

However, this isn’t the case because all of the scenarios returned the same amount on the initial $1,000 deposit.

As these examples illustrate, deposits will drive your earnings percentage down while withdrawals will push your earnings percentage up.

The earnings percentage returns are influenced by the size and timing of cash flows (deposits and withdrawals). While you can get an idea of the dollar-weighted average growth of your deposits, you won’t have a clear picture of your overall investment performance because earnings percentage is impacted by when and how much you deposited and withdrew during the account period.

Earnings percentage calculations attempt to tell you the average return of all the dollars invested in your portfolio. Generally speaking, the more you’ve invested recently, rather than in the past, the smaller this number will be. In a positive market environment, new dollars will have smaller returns than old dollars, and when you take money out, actual results can be difficult to decipher.

Now, let’s take a look at TWR to see how it measures portfolio performance.

Time-Weighted Return Defined

TWR tells us how your investments have performed over a specific time period, netting out the impact of deposits or withdrawals.

In the three earnings percentage examples from the previous section, which would have best represented your investment performance in all three of the scenarios: 1.8%, 20%, or 100%?

The answer: 20%. Even though you didn’t earn 20% of the ending balance in two of the three examples, this percentage accurately describes the performance of your investments for the year. Not surprisingly, 20% is also the time-weighted return for all three scenarios. Consider the following sample calculations.

How It’s Calculated

Unlike simple earnings percentage calculations, TWR is calculated with time as a variable. TWR considers account returns based on specific time periods. Consider the following equation:


\(EV_{1} = Ending\  Value\  for\ Time\ Period\ 1\)
\(EV_{2} = Ending\  Value\  for\ Time\  Period\ 2\)
\(SV_{1} = Starting\ Value\ for\  Time\  Period\ 1\)
\(SV_{2} = Starting\ Value\ for\  Time\  Period\ 2\)
\(D = Deposits\)
\(W =Withdrawals\)

\(\frac{EV_{1}  – \ D\  + \ W}{SV_{1}} \times \frac{EV_{2} -\ D \ + \ W}{SV_{2}} – 1 = TWR \)

Based on the same scenario above, with a $10,000 deposit, TWR would look like this:

\(\frac{$1,200}{$1,000} \times \frac{$11,200\  -\  $10,000}{$1,200} \ \ -\ 1 = 20\%\)

As you can see, the $10,000 deposit is deducted from the balance at the end of Period 2. This prevents the $10,000 deposit from affecting the return percentage.

TWR can be considered as the return generated by whatever money was in the portfolio over any given time period, regardless of portfolio size.

It is also the standard method used by mutual fund companies when advertising returns, because they need reliable metrics to account for the multiple deposits and withdrawals throughout the year that earnings percentages couldn’t accurately portray.

Viewing TWR History in Your Betterment Account

If you’d like to see TWR history for your Betterment goals, after logging in simply visit the Performance tab at the top of your account (between the Advice and Activity tabs).

Then, select “% Returns Performance” to the right of “$ Values Performance” above the chart.

You can then see TWR for single or multiple goals selected from the left-side dropdown, over a specified range by entering in start and end dates, or for a specific day in time by dragging the bar across time.

Here’s an example of TWR for a sample Traditional IRA Goal from the timeframe of Sept. 1, 2015, through July 15, 2016.

Based on this goal, it had earned 4% in TWR on April 19, 2016.

Time Weighted Returns in Performance Tab

Betterment account TWR

Our new performance tab also allows you to compare your goals’ TWR across various Betterment allocations and index funds. To do so, simply select the desired comparison from the dropdown under “Comparisons” to the far-right side.

A Note About Dollar-cost Averaging and How it Can Skew Results

To demonstrate the usefulness of time-weighted return, let’s look at an example of dollar-cost-averaging (DCA), a popular but misunderstood investment strategy. We don’t always recommend DCA because (when compared to investing all of your available cash right now) can lead to taking on the same risk, only later.

In a DCA strategy, you invest a predetermined amount of cash in the market on a set schedule. Note that voluntary DCA (where you have money currently but choose to invest it over time) is different from involuntary DCA (investing over time as you earn money).

Let’s say you have $100,000 of investable assets. You’ve decided to put $25,000 into your Betterment account upfront, and to make quarterly deposits of $25,000. Your assets in your account plus your deposits will grow with the market throughout the year. For this example, let’s say your returns are $2,000 at the beginning of Q2, $6,000 at the beginning of Q3, $10,000 at the beginning of Q4, and $15,000 at the end of the year:

Dollar Cost Averaging Example


How do you know if the strategy paid off? First, calculate your earnings percentage increase or decrease:

($115,000 – $100,000) / $100,000 = 15%

Here, your money earned 15% for the year—not too shabby. Your TWR tells a different story, however.

In this scenario, your TWR works out to 28%, indicating that if you had put the entire $100,000 into the market upfront, then your account would have earned $28,000.

While we understand this would not always be the case, in this example, the TWR lets you know that the DCA strategy cost you about $13,000 in earnings.

Now that we’ve defined both earnings percentage and TWR concepts in detail, let’s go back to the beginning and revisit the Safety Net account example.

Sample Betterment Account


Much like in the sample account where time-weighted return is 14.5% and earnings percentage is 3.6%, consistent savers will usually see an earnings percentage lower than TWR. That’s okay and even what you should expect as a long term investor.

This is because more recent deposits haven’t had as much time to grow as original deposits, therefore they have the potential to bring down the overall earnings percentage.

Pros and Cons of TWR and Earnings Percentage

While both earnings percentage and TWR are solid metrics for a clear picture into the success of an investment, we believe it’s important to consider the pros and cons of both.

Your earnings percentage reflects the portion of your ending balance that is attributed to gains (or losses) in the market.

However, because this calculation focuses on the change in value relative to your ending balance for that period, it may not tell you much about how your investments actually performed in the market. As a result, the percentage shown may be influenced by deposits and withdrawals.

Conversely, while TWR can tell you how your investments have performed for the period in question, it doesn’t take into account the impact of your deposit and withdrawal activity, making it difficult to determine how much of your ending balance is due to market performance.

Use Earnings Percentage and Time-Weighted Return Together

To truly understand how your investment have grown, consider the merits of both metrics. With both earnings percentage and TWR, you can better determine whether investing all of your available cash upfront will result in higher profits, as opposed to dollar-cost-averaging and withholding cash for investment at a later date.

This phenomenon is illustrated in a chart of the returns generated by individual deposits in a single account; the light-blue lines in the lower right corner represent the most recent deposits, whereas the dark-blue lines with the highest returns represent deposits from long ago:

Investment Performance by Recent vs. Previous Deposits


Each deposit has its own particular ride in the market, and your earnings are the collective experience of deposits. As you can see, the more time your money has been in the market, the more it can compound.

TWR lets you know how the investments have performed for a full period of a month, year, or decade. However, it only reflects how the investments have performed, not how much more your portfolio is worth compared to how much you’ve invested.

If Your Money Is Growing, TWR Usually Grows Faster

In the graph below, the darker line representing time-weighted return is what your portfolio would have returned if you had invested all of your future deposits into your account on day one:

Time-weighted Return and Earnings Percentage Comparison

Because you don’t have access to all of our future earnings now, you must make deposits gradually over the years. But TWR serves as a reminder that the longer you’re in the market, the more your money has a chance to grow.

If you see your TWR beating out your earnings percentage, it’s likely because you’ve made additional deposits to your account that, as seen from the examples above, will push your earnings percentage down regardless of market performance. One caveat however, is that if the market were to go down, new deposits would bring the average return up. So in absolute value, earnings is always smaller.

After over 20 years of consistently depositing money in your account, the difference between your earnings percentage and your TWR may very well be as far apart as it is in the chart above—especially if you’re a diligent investor.

If this is the case for your investment portfolio, take comfort in knowing that we believe you’re on the right track.

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