"Did I beat the market?" sounds like a question with a simple answer: your return against the index's. It only is if you invested one lump sum on the first day of the period and added nothing after. Almost nobody does.
What a published index return assumes
The figure quoted for an index over a year, whether it is the FTSE 100, the S&P 500 or the FTSE All-World, is what £1 invested at the start of the year was worth at the end. If you invested every month, or added a bonus in June, your money did not have that year, even if every penny went into a fund tracking that index.
An example
An index starts the year at 100. It falls steadily to 83 by June, then recovers to 108 by 31 December. Its published return for the year is +8%.
You put £1,000 into a fund tracking it on the first of every month: £12,000 in all. Much of it was bought cheaply, near the low. On 31 December it is worth £14,093, a gain of £2,093.
Measured as a money-weighted return on those twelve dated payments, that is +33.7% for the year. Most of the money was invested for only a few months, and it rose a lot in that time.
Now suppose your own portfolio, invested the same way on the same dates, made a money-weighted 25%. Set beside the index's published 8%, it looks as if you beat the market by 17 points. Set beside 33.7%, which is what the index would have done with your money, you were nearly 9 points behind.
The timing can just as easily work the other way. Money added at a peak will make a published index return look generous beside your own, and you would conclude you had done worse than you did.
The like-for-like test
Take every amount you put in and took out, on the dates you did it, and imagine each one had gone into the index instead. Work out what that would be worth today, and calculate the money-weighted return on it in exactly the same way as your own.
The two figures then describe identical money on identical dates. Timing affects both equally, so the difference between them is what your choices of investment were worth against the index over that period. That is the question "did I beat the market?" is really asking.
Two details matter. The index should include its dividends, as an accumulating tracker fund does, because your own return includes yours. And it should be converted into the currency you think in, on each date, because that is the currency your own return is in.
There is a different and equally legitimate question: how good were the investments themselves, regardless of when you added money? That is what a time-weighted return answers, and it is how fund managers are compared. It is not the same question as how your money did. Why your platform's return doesn't match what you made sets the two side by side.
How Fairworth does it
Fairworth takes every amount you put in and took out, on the same dates, and puts it into or takes it out of the index you choose. The indices are measured through accumulating tracker funds, so dividends are included, and converted into your display currency on each date. The choice includes the FTSE 100, the FTSE 250, the S&P 500, the MSCI World and the FTSE All-World, among others.
The benchmark line on the Returns chart is what your money would be worth in that index, and Time reports calculate its money-weighted return beside yours for the period you choose. The same benchmark can be applied to all your accounts or any subset of them.
The example is illustrative: the index path is invented and the figures are rounded. It is not the performance of any real index or investment. This page is information, not investment advice.
More on Returns and benchmarks
- Why your platform's return doesn't match what you made ExplainerSimple, time-weighted and money-weighted returns, and what the pound does to all three.