Why Your Broker's Return Number Is Misleading

The return number on your brokerage dashboard is probably wrong. Not because your broker is being dishonest — but because calculating portfolio returns correctly is surprisingly hard, and most brokers display the simplest approximation rather than the right answer.

Here's what's actually going on.

The Simple Return Problem

The most basic return calculation is:

Return = (Ending Value − Starting Value) / Starting Value

This works fine if you put money in once and never touch it again. The moment you make a deposit or withdrawal, it breaks down completely.

Example: You start with $100,000. The market crashes and your account drops to $80,000. You decide this is a buying opportunity and add $50,000, bringing your total to $130,000. The market recovers and you end the year at $170,000.

Simple return: ($170,000 − $100,000) / $100,000 = 70%

But you added $50,000 during the year. Is 70% your actual return? No — a significant portion of that gain came from the capital you deployed during the dip, not from investment performance.

What Your Broker Usually Shows

Different brokers handle this differently:

Total return since inception — The raw percentage change from your initial deposit to today. Completely distorted by any subsequent deposits or withdrawals.

Period return — The change over a fixed window (YTD, 1 year, etc.). Better, but still distorted by cash flows within that window.

Personal rate of return (IRR) — Some brokers compute a money-weighted return, which accounts for the timing and size of your cash flows. This tells you your personal outcome, but it rewards lucky timing of deposits and penalizes unlucky timing — it doesn't isolate investment skill.

Time-weighted return (TWR) — The correct metric for evaluating investment strategy. It neutralizes the effect of cash flows entirely. Alpaca's profit_loss_pct is TWR. Most other brokers don't surface it.

The Three Numbers and What They Mean

Simple return is the number most brokers show by default. It's fine for passive index fund investors who never touch their accounts. It's misleading for everyone else.

IRR tells you the actual dollar outcome of your specific investment timing. If you happened to add a lot of capital right before a big run-up, your IRR looks great. If you added capital at a peak, it looks terrible. Neither outcome reflects the quality of your investment strategy.

TWR strips out your deposit/withdrawal timing. It asks: "if this strategy had been run on a constant pool of capital, what would the return have been?" This is what the CFA Institute requires for performance reporting (GIPS standards), and it's the right number for understanding whether your approach is working.

The Benchmarking Problem Compounds This

Even if you know your correct return, comparing it to a benchmark is tricky.

If you're comparing your return to "SPY returned 18% this year" — that's a total return for someone who invested a lump sum on January 1 and held. If you were adding money throughout the year, you need a TWR figure for yourself and a benchmark return calculated over the same methodology.

Comparing your IRR to SPY's lump-sum return is like comparing your marathon time to someone else's 5K time. They're measuring different things.

What to Look At Instead

For evaluating your strategy: Time-weighted return, Sharpe ratio, and drawdown. These are methodology-agnostic and tell you how the strategy itself performed.

For planning your finances: IRR, because it reflects the actual dollars gained or lost given when you happened to have money in the market.

For comparing to benchmarks: TWR against TWR. Make sure you're using the same calculation methodology for both your portfolio and the benchmark.

How AlphaLens Handles This

AlphaLens uses the TWR series from your broker directly:

• Alpaca provides profit_loss_pct in its portfolio history endpoint — this is already a TWR series, computed by Alpaca's own systems.
• IBKR provides a Cumulative Performance Series (CPS) from its Performance Analytics API — also a TWR calculation.

Both are plotted as your return series. The benchmark (SPY or another index) is fetched and plotted against the same baseline, so the comparison is apples-to-apples.

The metrics panel shows both TWR (labeled as cumulative return) and IRR — so you can see both your strategy's performance and your personal financial outcome in the same view.

Connect your broker to see your real return numbers.