Why It Matters More Than You Think
Every investor loves to talk about growth, yield, dividends, or how much they saved last year.
A growing dividend income is very nice — it’s proof that your portfolio is working for you.
But it doesn’t tell you when you’ll reach your financial goal.
That’s where your rate of return comes in. It’s the one number that quietly determines your entire financial trajectory.
It’s not just about whether you made 6% or 8% this year. It’s the metric that tells you if you’re truly moving toward financial independence or simply treading water.
The True Meaning of Rate of Return
Your rate of return (ROR) is the percentage gain (or loss) you earn on your investments over time. It tells you how efficiently your money is working.
A 2% rate of return might look safe — until you realize that inflation eats 3% of your purchasing power each year. That means you’re effectively falling behind.
An 8% return, on the other hand, may sound modest, but it doubles your money every 9 years (using the Rule of 72). That’s how wealth quietly compounds.
Rate of Return | Years to Double (Rule of 72) |
|---|---|
4% | 18 years |
6% | 12 years |
8% | 9 years |
10% | 7 years |
💡 Did You Know?
If you consistently earn 8% instead of 6% over 30 years, your ending portfolio will be almost twice as large — just from a 2% difference in return
The Different Ways to Measure It
Investors often get confused by the different types calculations to show your portfolio returns. Each serves a purpose depending on what you want to measure.
Simple Return — compares the ending value to the starting value. Great for a one-year snapshot.
Annualized Return (CAGR) — shows your average annual growth rate over multiple years. This is what you should compare between investments.
Internal Rate of Return (IRR) — factors in the timing of your contributions and withdrawals. This tells you how you performed as an investor.
Time-Weighted Return (TWR) — neutralizes the impact of cash flows. Used to measure the performance of a fund manager.
👉 The key takeaway: CAGR and IRR are your real “trajectory” numbers. They reveal how fast your portfolio is growing toward your goals.
⚠️ Caveat for New Investors:
When you’re just starting out — especially during your first year — your rate of return can fluctuate dramatically. That’s because the math scales your results to a full-year basis, even if you’ve only been invested for a few months.
Example: if your portfolio gains $200 on a $1,000 investment in three months, your “annualized” return will appear as 80%, which is unrealistic over the long term.
It takes a full 12-month cycle (and ideally several years) before your rate of return settles into a meaningful number that reflects your true performance.
✈️ YOUR TRAVEL ESSENTIALS
Remember why you invest, it’s to enjoy life and everything it has to offer. Don’t forget to treat yourself once in a while.
Kodak Camera Strap
Travel means pictures 📷!
I like to travel light, so I have a small Fujifilm camera and this strap is amazing. You can also wear it as a sling out of the way with quick access.
How Canadian Brokers Calculate Your Rate of Return
Most Canadian brokers — including TD Direct Investing, RBC Direct Investing, BMO InvestorLine, Scotia iTRADE, and Questrade — use the money-weighted rate of return (MWRR), also known as the Internal Rate of Return (IRR).
That means your reported return already reflects:
The timing and size of every deposit or withdrawal
The compounding effect of market performance
Any fees or cash flows affecting your account
Broker | Method Used | CRM2 Compliant |
|---|---|---|
TD Direct Investing | Money-Weighted (IRR) | ✅ |
RBC Direct Investing | Money-Weighted (IRR) | ✅ |
BMO InvestorLine | Money-Weighted (IRR) | ✅ |
Scotia iTRADE | Money-Weighted (IRR) | ✅ |
Questrade | Money-Weighted (IRR) | ✅ |
What “CRM2 Compliant” Means
You’ll notice every broker lists their rate of return as CRM2 compliant — and that’s important.
CRM2 (Client Relationship Model – Phase 2) is a regulatory standard introduced by the Investment Industry Regulatory Organization of Canada (IIROC).
It requires all Canadian investment dealers to report performance and fees in a consistent, investor-focused way.
Specifically, CRM2 mandates that your broker must:
Show your personal rate of return using a money-weighted method (IRR).
Include all deposits, withdrawals, and fees in that calculation.
Report the return since account inception and for other standardized time frames.
The goal is transparency — to make sure every investor sees how their actual money performed, not just how the market or a fund did. However, it’s not always up front and in your face, you have to dig for it a little.
Why Growth Can Be Misleading Over Time
Here’s where many investors get tricked: growth isn’t the same as performance.
A portfolio might look like it’s growing, but that doesn’t always mean your investments are delivering a strong return.
There are a few common traps:
1️⃣ Contributions Mask Performance
When you add money regularly, your portfolio balance will grow even if returns are flat.
Example: You invest $1,000 per month for five years — that’s $60,000 in contributions. If your portfolio is worth $65,000, your growth is only $5,000, not 8% per year.
2️⃣ Market Swings Distort Perception
After a bull run, your portfolio might show +30% growth — but if you started right before a crash, your long-term CAGR could still be under 6%.
Growth snapshots exaggerate success; compounding smooths it out.
3️⃣ Inflation Eats Real Gains
A 5% nominal return in a 3% inflation world is really only a 2% real return.
You’re growing, but your purchasing power is barely moving.
4️⃣ Sequence of Returns Risk
Two investors can earn the same average return but end up with drastically different outcomes depending on when the bad years hit.
Growth charts ignore when returns happen — the order matters, especially near retirement.
Bottom line: Don’t mistake growth for progress. A rising balance doesn’t always mean your money is performing well — sometimes, it’s just your contributions doing the heavy lifting.
That’s why tracking your personal rate of return (IRR) is critical — it isolates how efficiently your capital is compounding.
Why Gains and Losses Don’t Tell the Full Story
Most investors look at the “Gain/Loss” column in their brokerage account and assume it reflects how well their portfolio is doing.
It doesn’t.
That number only measures the market value change of the securities you currently hold — not your entire investing outcome.
Here’s what it misses:
1️⃣ It ignores past profits.
If you sold a stock for a gain and reinvested the proceeds, that profit disappears from the gain/loss view even though it’s part of your overall return.
2️⃣ It excludes contributions.
Adding new money increases your account value, but your gain/loss figure won’t show that as “growth.”
You might see a small unrealized gain even if your portfolio value has grown significantly from steady contributions.
3️⃣ It’s position-based, not account-based.
Gains and losses apply only to your active holdings.
If you switch from one ETF to another, the slate resets and your previous gains are no longer visible in that column.
4️⃣ It doesn’t account for dividends or distributions.
Dividend income may show separately, so your “gain/loss” can understate total performance — especially for dividend-growth investors.
Example:
You invest $10,000 in an ETF and add another $10,000 six months later. Your current holdings show a $500 unrealized gain. Your gain/loss line says +$500 (2.5%), but your portfolio value is actually $20,500 — up $500 on $20,000 invested, or just 2.5% total over two deposits, not annualized. Your rate of return, however, might show 5% annualized, since it factors in the timing of both contributions and the compounding effect.
In short, gain/loss is a snapshot, not a performance measure.
To see how your wealth is really progressing, always rely on your rate of return — it captures everything: contributions, dividends, reinvestments, and compounding over time.
Why Rate of Return Is More Important Than Contributions
Many investors obsess over saving more. But once your portfolio crosses a certain threshold, your returns matter more than your contributions.
Example:
You invest $1,000/month = $12,000/year
Your portfolio is worth $300,000
An extra 1% in annual return adds $3,000/year — more than an extra month of savings.
At some point, your money works harder than you do. You could switch from being a saver to enjoying every day sooner than you think.
How to Track It
You don’t need to be an accountant to measure your return. Tools like Google Sheets, Portfolio Visualizer, or portfolio trackers (e.g., the one on DividendEarner’s Portfolio Tracker) can calculate it automatically.
For a manual check, you can use the formula for CAGR:
Example:
You invested $100,000 → it grew to $215,000 in 10 years.
Your long-term rate of return is 7.9%, which means your portfolio doubled just under every 9 years.
Your Rate of Return Defines Your Financial Freedom Date
Let’s say your goal is $1 million for retirement.
Average Return | Years Needed to Reach $1 M (Saving $1,000/mo) |
|---|---|
4% | 30 years |
6% | 26 years |
8% | 22 years |
10% | 20 years |
A small difference in return can shift your retirement by almost a decade. That’s the power of understanding your rate of return.
Final Thoughts — Make It Your North Star
Your rate of return tells your story — how efficiently your money grows, how fast you reach freedom, and how your strategy performs through ups and downs.
Don’t ignore it. Don’t guess it. Track it.
Every decision — what you buy, how you allocate, how often you rebalance — feeds into this one number.
It’s your financial trajectory, and it deserves your full attention.