Time-Weighted Return
AdvancedTime-weighted return is a measure of investment performance that removes the effect of money being added to or withdrawn from a portfolio, showing how the investments themselves performed.
When investors add or withdraw money, simple return calculations can be distorted. Time-weighted return splits the period into sub-periods between each cash flow, calculates the return for each, and links them together by multiplying.
For example, an investment of 100,000 rises 20% in year one to 120,000. The investor then adds 100,000, bringing it to 220,000, and the portfolio falls 10% in year two to 198,000. The time-weighted return is 1.20 multiplied by 0.90, minus 1, which equals 8% over two years, or about 3.9% a year. The large deposit before the fall does not affect the result.
Because it ignores the timing and size of contributions, time-weighted return is the standard way to measure and compare the performance of fund managers, who do not control when clients add or withdraw money. Industry standards for reporting investment performance generally require it.
For individual investors, it may not reflect their personal experience, which is better captured by money-weighted return.
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