📈 Performance Metrics
When evaluating the success of an investment portfolio, looking only at the total balance or absolute profit is not enough. To truly understand performance, you need standardized metrics that answer different questions: "How did my assets perform?", "How good was my timing?", and "What is the return on this specific trade?".
🎭 The Two Actors in Your Portfolio
To understand why multiple metrics exist, imagine there are two different "actors" managing your wealth:
- The Market (The Assets): Causes the prices of the things you own to go up or down.
- You (The Investor): Decides when to deposit or withdraw cash from the portfolio.
These two actors can have vastly different performances. You might pick an excellent stock (The Market performs well), but you might buy it at the very top just before a crash (You perform poorly). LibreFolio uses different metrics to isolate these two behaviors.
📚 Topics in this Chapter
| Metric / Concept | Description |
|---|---|
| Simple ROI | Absolute percentage return generated by an investment relative to its cost. Ideal for evaluating single positions. |
| TWRR | Time-Weighted Rate of Return. Measures the pure performance of the underlying assets, ignoring cash flow timing. |
| MWRR (XIRR) | Money-Weighted Rate of Return. Measures your personal investor performance, accounting for the timing of cash flows. |
| Weighted Average Cost | The average unit cost of an asset in a portfolio, weighted by the acquired quantities. |
💡 The Practical Example (TWRR vs MWRR)
Let's look at an extreme example to see how TWRR and MWRR tell two completely different, but mathematically correct, stories.
- Month 1: You have great intuition. You buy €1,000 of a stock. The next month, the stock doubles (+100%). You now have €2,000.
- Month 2: Caught up in the excitement, you empty your savings account and deposit another €100,000 into the exact same stock. You now have €102,000 invested.
- Month 3: Unfortunately, the stock drops by -10%. Your total capital drops from €102,000 to €91,800.
If you look at LibreFolio now, what will you see?
📈 Your TWRR will be: +80%
Why? The assets you picked went up +100%, and then dropped -10%. Mathematically:
The assets you chose performed incredibly well. If you had invested all your money on day 1, you would be rich. Your asset picking was excellent.
📉 Your MWRR will be: STRONGLY NEGATIVE (approx. -9%)
Why? You deposited a total of €101,000 out of your own pocket, but you currently hold €91,800. You have suffered a real, absolute loss of €9,200! Your terrible timing—depositing €100,000 right at the peak before a drop—destroyed your returns. Your timing was terrible.
⚖️ Why LibreFolio shows both side-by-side
By placing TWRR and MWRR next to each other on your Dashboard, LibreFolio gives you an immediate behavioral diagnosis:
- TWRR > MWRR: "You are picking good investments, but your timing is bad. You are likely buying at the top (FOMO) and dragging your personal returns down."
- MWRR > TWRR: "You have excellent timing! You are buying assets at a discount when the market drops, boosting your personal returns above the market average."