Time-Weighted Return Explained
Time-weighted return (TWR) measures how an investment performed regardless of when money was added or withdrawn. It splits the period at each cash flow, calculates the return of each sub-period, and chains them: (1 + r₁) × (1 + r₂) × … − 1. It's the standard for comparing funds and managers, because the investor's deposit timing doesn't affect it.
At a glance
- Formula
- (1 + r₁) × (1 + r₂) × … × (1 + rₙ) − 1
- Removes
- The effect of deposit and withdrawal timing
- Use it for
- Comparing a portfolio, fund or manager against a benchmark
- Needs
- A portfolio valuation at every cash flow
How do you calculate time-weighted return?
Split the period at every deposit or withdrawal, calculate each sub-period's return from the value just after one cash flow to the value just before the next, then multiply (1 + each return) together and subtract 1.
Worked example
A portfolio starts the year at $10,000 and grows to $11,000 by 1 July. The investor then deposits $5,000, bringing it to $16,000. By 31 December it is worth $15,200.
| Start value | Cash flow | End value (before flow) | Period return | |
|---|---|---|---|---|
| Jan 1 to Jul 1 | $10,000 | $11,000 | +10.00% | |
| Jul 1 | +$5,000 deposit | |||
| Jul 1 to Dec 31 | $16,000 | $15,200 | −5.00% |
TWR = (1 + 0.10) × (1 − 0.05) − 1 = 1.045 − 1 = 4.50%.
The $5,000 deposit doesn't enter the calculation except to reset the starting value of the second period. The 4.50% describes how the investments performed, whatever the investor chose to add.
Why it matters
If you compared portfolios using simple gain divided by money invested, the result would depend on when each investor happened to add money. TWR removes that, which is why performance standards such as the CFA Institute's GIPS standards generally require it for presenting investment-manager performance.
Limitations
- It needs a valuation at every cash flow. Where those aren't available, approximations such as the Modified Dietz method are used.
- It doesn't describe your personal outcome. Adding money just before a fall hurts you, but TWR ignores it. That's what money-weighted return captures.
Frequently asked questions
Is TWR the same as CAGR?
With no cash flows over a multi-year period, annualized TWR equals CAGR. With cash flows, CAGR on start and end values is misleading and TWR is the correct measure.
Which return does my portfolio tracker show?
Check its documentation. Many trackers show TWR, some show money-weighted return, and some let you choose.
Sources
- GIPS Standards (CFA Institute) — global standards for calculating and presenting investment performance