Time-weighted return

Before you rely on it

What to check

Use this for the manager and a money-weighted figure for your own experience.

The common error

Where people go wrong with time-weighted return

Reading a fund's published time-weighted return as what you earned. Yours depends on when you bought, and the two can differ substantially.

Worked through

Time-weighted return in plain numbers

An investor starts with $10,000. In year one it grows 20% to $12,000, and the investor then adds $10,000, making $22,000. In year two it falls 10% to $19,800; the time-weighted return links the two period returns and ignores the deposit: 1.20 × 0.90 = 1.08, a total gain of 8%, or about 3.9% a year; it measures what the investments did, not what the investor's dollars did. The investor's own money-weighted result is worse, because the larger balance sat through the losing year. Fund managers are judged on the time-weighted number, since they do not control when clients add or withdraw money.

Easily confused

Time-weighted return and its neighbours

Time-weighted return is not money-weighted return, simple return or CAGR. Money-weighted return, closely related to IRR, includes the size and timing of cash flows and reflects the investor's experience. Simple return divides gain by starting value and can be distorted by flows. CAGR assumes no flows. Time-weighted return breaks the period at every cash flow, computes the return of each subperiod and links them; it is the standard for comparing managers and funds.

In real decisions

Where time-weighted return turns up

Fund companies and advisors report it, and performance standards require it; investors use it to judge whether a manager or strategy did well independent of their own deposits and withdrawals; comparing it with the money-weighted return shows the effect of timing decisions. Retirement plan reports often show time-weighted returns. When comparing to an index, it is the like-for-like measure.

Know the edges

Where time-weighted return stops being reliable

It needs valuations at each cash flow date, which can be a burden; it says nothing about the investor's actual gain or loss in dollars. For assets valued infrequently, such as private holdings, approximations are needed, and compare only figures computed on the same basis and period. Past returns do not predict the future.

Quick answers

What people ask about time-weighted return

Why do funds report time-weighted returns? Because managers do not control when clients add or withdraw money. The measure isolates the investments' performance from those decisions.

How often must values be measured? At every large cash flow, or at least monthly, for accuracy. Daily valuation gives the most precise link.

Can I calculate it myself? Yes. Compute the return for each period between cash flows, add one to each, multiply them and subtract one. A spreadsheet does it easily.

What is a sub-period return? The return between two cash flow dates. Time-weighted return links these sub-period returns, so the size of deposits does not matter.

Why can time-weighted and money-weighted returns disagree? Because the second depends on when you added or withdrew money. If you added before a fall, your result lags the fund. If you added before a rally, it beats it.