Money-weighted returns (and why staggered deposits reduce your risk)

Your profit achieved, or your return, can be calculated in different ways. In the Peaks app, we use the money-weighted way of calculating returns.

A money-weighted rate of returns takes into account your deposits and withdrawals and the moments when you deposit or withdraw. A different exchange rate applies at each moment. Therefore, when and how much you deposit has a strong influence on the returns you see. The returns of all Peaks accounts therefore differ because their deposit and withdrawal behaviour is different.

The returns your investments have made over the entire period may differ - both positively and negatively - from the returns of the funds at Peaks (which you can see in the app in your portfolio screen). Read on for an explanation of how this works!

An example of a money-weighted returns calculation

Say you start with a one-off deposit of €100, deposit €7 every week and also €20 every month. At the end of the first month, you will have deposited €148 on 6 different purchase occasions. Each time you bought shares and bonds, a different price (probably) applied.

Since your first deposit was the longest ago and the largest, it carries the most weight. This deposit has had the longest time to pay off - positively or negatively. Was there a low price at the time you made your first deposit, and did prices climb afterwards? Yess, then you made a positive (notional) return on that first deposit! Was the purchase price on the high side and prices took a downwards turn after your first deposit? Unfortunately you then received a negative (notional) return.

How real are the figures calculated?

As long as you don't withdraw your money, your return is just a figure in your Peaks app. You only realise a profit or loss the moment you withdraw your money.

So the moment in which you invest is quite important. The tricky thing here is that you never know when prices will rise or fall. You simply cannot predict the future. Theoretically, it is best to put in a large amount at the start, as this is means your investment will pay off for the longest time. In practice, however, stock markets don't tend to go up in one straight line.

In order to reduce your risk of investing at the wrong moment, it may therefore be wise to spread your investments. You then buy shares and bonds at different prices and are less dependent on when you buy in.

Remember that investing takes risk and you may lose (part of) your investment.