Calculating Your Real Return: Time-Weighted Versus Money-Weighted

Alpha Sentinel is a software platform, not a registered investment adviser. This article is educational, not investment advice. Full disclaimer at the end of this post.

You finish a long week, open the annual performance report from your brokerage, and see a return that does not match the change in your balance. You added money in the spring and took some out in the fall, and the two numbers on the page seem to describe different accounts. They do, in a sense. Time-weighted return measures how the investments performed regardless of when you added or withdrew money, while money-weighted return measures how your own dollars performed given the timing of your deposits and withdrawals. Neither is wrong, and each answers a different question.

Key Takeaways

• Time-weighted return removes the effect of deposits and withdrawals so that it reflects the performance of the holdings themselves.
• Money-weighted return, closely related to the internal rate of return, reflects your actual experience including the timing of your cash flows.
• When you control the timing of contributions, the two figures can differ, sometimes by a wide margin.
• Use time-weighted return to compare against a benchmark or another manager, and money-weighted return to judge your own results.
• Look at the label on any reported return before drawing conclusions from it.

What Is a Time-Weighted Return?

A time-weighted return chops the measurement period into sub-periods, one for each time money enters or leaves the account. It calculates the return in each sub-period and then links them together by multiplying. Because each sub-period starts fresh with whatever balance was present, the size and timing of your deposits do not influence the result.

That property is the point. If two investors held exactly the same holdings during the year, but one added a large sum just before a decline and the other added it just before a rally, their time-weighted returns would be identical, because the holdings behaved identically. The measure isolates the performance of the investment choices from the performance of the contributor.

What Is a Money-Weighted Return?

A money-weighted return finds the single annualized rate that, applied to every dollar for the time it was actually invested, explains the starting balance, the cash flows and the ending balance. It is the same math as an internal rate of return in corporate finance, and spreadsheet functions such as XIRR perform it.

Here, timing matters a great deal. A large contribution made before a decline pulls the money-weighted figure down, because many dollars experienced the decline. A large contribution made before a gain pushes it up. The measure reflects the combined result of what you owned and when you put money to work.

Why Do the Two Numbers Differ?

They differ whenever cash flows are uneven relative to performance. If the account had no deposits or withdrawals during the period, the two methods agree. As flows grow larger relative to the balance, and as they coincide with market moves, the gap widens.

A common pattern for professionals is regular contributions funded from salary, plus occasional lump sums from bonuses or the sale of a property. If those lump sums happened to arrive before a weak stretch, the money-weighted return will look worse than the time-weighted return, even though the investment selection did not change. The reverse can also happen, which is a reminder not to treat a flattering money-weighted result as a skill.

Which One Should You Use?

The answer depends on what you are trying to learn. If you want to know whether your holdings did better or worse than a benchmark or a fund manager, time-weighted return is the fair measure, because it removes the distortion of contributions that the manager could not control. This is why industry standards for performance reporting by investment managers, such as the Global Investment Performance Standards, rely on time-weighted methods.

If you want to know how your own money actually grew, including the effect of your timing decisions, money-weighted return is more informative. It captures the benefit or damage of your choice to add or withdraw at particular moments. Many investors find that looking at both is the most useful habit, because a persistent gap points to how much of the outcome came from timing rather than selection.

Reported returns on statements are not always labeled clearly, and different institutions use different conventions. Read the footnote that describes the method before comparing figures across accounts or years.

How Do You Calculate Each One in Practice?

For time-weighted return, record the account value just before each cash flow, calculate the return for each sub-period as ending value divided by starting value, minus one, then multiply the growth factors (one plus each sub-period return) together and subtract one. Monthly valuation points are a workable approximation if cash flows are small or occur on known dates.

For money-weighted return, list each cash flow with its date, treat deposits as negative values and withdrawals and the ending balance as positive values, and let a spreadsheet function solve for the rate. Because it is solved iteratively, it is best left to software. Neither calculation requires special data beyond your statements, and your brokerage may already provide both, so check the performance section of your account before building anything yourself.

An Illustrative Example: Same Holdings, Different Timing

This example uses made-up round numbers and is not drawn from any real account. Imagine two investors who hold identical portfolios over two periods. In the first half of the year, the portfolio falls 10 percent. In the second half, it rises 10 percent.

Both investors start with 100,000 dollars. Investor A adds nothing. Investor B adds 100,000 dollars at the midpoint, after the decline. Their time-weighted returns are identical: 0.90 times 1.10 is 0.99, so each is down 1 percent. But A ends with 99,000 dollars, a loss of 1,000, while B has 90,000 plus 100,000 added, or 190,000, growing by 10 percent to 209,000, a gain of 9,000 on 200,000 contributed. B's money-weighted return is clearly higher, because more dollars were invested during the rise. Same holdings, same time-weighted return, different personal experience, entirely because of when the contribution arrived.

Frequently Asked Questions

What is the difference between time-weighted and money-weighted return?

Time-weighted return strips out the effect of deposits and withdrawals to show how the investments performed, while money-weighted return includes their timing to show how your own dollars performed. The first suits comparing against a benchmark, and the second suits assessing your personal results.

Which return does my brokerage statement show?

It varies by institution and by report, and some statements show both. Check the footnotes or the performance methodology page, because the label determines how the number should be interpreted.

Can money-weighted return be higher than time-weighted return?

Yes, if you added money before a rise or withdrew before a decline, the money-weighted figure can exceed the time-weighted one. It can also be lower, and because timing can be luck, a higher number does not necessarily indicate skill.

Do I need to adjust either return for inflation?

Both measures are normally reported in nominal terms, so adjusting for inflation is a separate step. To see the change in purchasing power, divide one plus the return by one plus the inflation rate and subtract one.

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