Measuring performance
Time-weighted return
Also called TWR
A return that strips out the effect of money you added or withdrew, so it measures the investments alone.
How it works
TWR breaks the period at every cash flow, computes the return of each sub-period, and links them together. Adding money before a rise no longer flatters the figure.
It is the standard for judging a manager or a strategy, because the manager did not control when the money arrived.
Where it misleads people
TWR is the wrong measure of your own outcome. It deliberately ignores the fact that you had far more money invested during the bad period, which is precisely the thing that determined your result.
Worked example
You hold $100,000, it grows 10%, then you add $200,000 and the portfolio falls 5%. TWR = 1.10 × 0.95 − 1 = 4.5%, regardless of the fact that most of the money only experienced the fall.
Guide
Related terms
- Money-weighted returnThe return your actual money earned, counting when each contribution and withdrawal happened.
- BenchmarkThe index or reference portfolio you measure yourself against, to see whether your decisions added anything.
- ReturnWhat an investment gained or lost over a period, as a percentage of what it was worth at the start.
- Behaviour gapThe difference between what a fund returned and what its investors actually earned in it.
Mentioned in
More in Measuring performance
- Total return
- Survivorship bias
- Tracking difference
- Sortino ratio
- Tracking error
- Sharpe ratio
- Unrealised profit and loss
- Risk-free rate
All 29 Measuring performance terms · The full glossary, 433 terms
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