Your quarterly and annual performance reports break down your total return by asset class—cash, bonds, and equities—in both dollars and percentages. These details reveal the asset class that had the most impact on your total return and demonstrate the relative volatility of cash, bonds, and equities. The final dollar value of your portfolio’s gains or losses is known as absolute performance. Also called total return, it is the total of the interest income earned plus the dividend income earned and any price gains measured in the reporting period.
It is important to remember that contributions to and withdrawals from your portfolio are not included in the return calculation. For example, a portfolio that starts with $100, receives a $100 contribution, and reports $200 has not earned a 100% return. In this example, the performance calculation recognizes and excludes the contribution, and correctly computes a 0% return.
Relative performance is the comparison of portfolio returns with an index. It helps to illustrate the state of the markets and identify whether the portfolio’s returns are reasonable in current market conditions.
Holding foreign securities makes the evaluation of performance more complicated. Performance is calculated in only one currency: the reporting currency. Typically, our reporting currency is Canadian dollars, and the value of foreign holdings can change dramatically when large swings in currency occur.
Measuring and understanding your portfolio’s performance is key to evaluating your financial position, especially as you see the effects of erratic markets, contributions, and withdrawals over time.