Betterment reports two main types of returns calculations:
- Earnings performance is found under the “$ VALUES PERFORMANCE” sub-tab, and takes into account the timing and size of cashflows into and out of the account.
- Time-weighted return is found under the “% RETURN PERFORMANCE” sub-tab, and reflects the returns of your portfolio ignoring size and timing of cash flows.
Simple Earnings Percentage
The Simple Earnings Percentage is a simple measure of how much your portfolio has grown, as a percentage of how much you invested. It should not be used to compare to other accounts, unless those accounts had the same exact cash flows (which isn’t a likely situation).
The earnings percentage is generally calculated as:
- The amount your account has earned
- Divided by the amount you have invested (there are exceptions to the rule—read on to learn more.).
Adjusting the Simple Earnings Percentage
The simple earnings percentage has drawbacks that can lead to very unintuitive results. Whenever the current net amount invested is very different than the amount that was invested for the majority of the period, then the simple earnings percentage communicates very little about the success of the account.
In these cases, Betterment adjusts the simple earnings percentage so that the calculation provides a useful picture of the account. Our adjustment consists of dividing the investment earnings by the average amount invested over the period—rather than the current net amount invested. This alternative calculation is invoked whenever the value of the current net invested amount is less than 80% of the average daily invested amount. We’ll explain this logic with some examples.
Imagine that you invest $100,000 with Betterment and earn $1,000 in the first 30 days. Your account is now worth $101,000. Your earnings percentage is equal to 1%, which is calculated by dividing the earnings, $1,000, by the net amount invested, $100,000.
Now, imagine that on the last day of the month you withdraw $90,000 to put a downpayment on a house. Your net total investment is now $10,000 (100,000 - 90,000), but your balance is $11,000. By the simple earnings percentage calculation, your return is now $1,000 divided by $10,000, or 10%. This number does not accurately reflect your actual returns.
In these cases, your actual earnings percentage is better represented by dividing the amount earned by your average invested amount over the time period. Because you had about $100,000 for most of that month, except the last day when it was $10,000, your average invested is $97,000. So your earnings percentage in this case is $1,000 / 97,000 = 1.03%. While this adjusted percentage isn’t a perfect reflection of reality either, it does tend to be much more representative of your actual return than the distorted 10% number.
In order to decide when to use this alternative earnings percentage logic, we check if your average daily invested amount is substantially different than your current invested amount.
Annualized Simple Earnings
If you hover on the “Total Simple Earnings” card, you may also see your annualized simple earnings. This value will only show if that goal has been invested for more than one year.
The annualized simple earnings adjusts your simple earnings percentage for how long you’ve been invested. For example, suppose you’ve been invested for 4.12 years (just over 4 years and 1 month), and you have an Simple Earnings Percentage of 20.9%. You might ask “How much is that, on average, for each year?”
To calculate the Annualized Simple Earnings Percentage, we adjust simple earnings using the formula below:
Annualized Earnings = [(1 + Earnings Percentage) ^ (1 / years invested)] - 1
In the example above, we’d have:
4.7% = [(1 + 0.209) ^ (1/4.12)] - 1