Time-weighted return

How it works

Both figures answer a question about one account over one period. They differ in what they treat as noise.

The performance standards this industry is measured against define them in one line each. The GIPS standards call a time-weighted return a method of calculating period-by-period returns that reflects the change in value and negates the effects of external cash flows, and a money-weighted return the return for a period that reflects the change in value and the timing and size of external cash flows. An external cash flow is capital, cash or investments, entering or leaving the portfolio — and dividend and interest income payments are specifically excluded from that definition.

The time-weighted mechanism is sub-period returns, linked. Value the portfolio, compute the return over the stretch until the next cash flow, value it again at the flow, and continue; then multiply the sub-period returns together. The GIPS requirements are explicit about both halves: for portfolios in a composite, valuation must happen at least monthly, on the last business day of the month, and on the date of all large cash flows, with the firm defining what large means for each composite; and returns must be calculated at least monthly, with sub-period returns calculated at the time of all large cash flows where daily returns are not, and the periodic and sub-period returns geometrically linked. Where a valuation at the flow is unavailable, approximations such as the Modified Dietz method weight each flow by the fraction of the period it was present instead of revaluing — the same intent, one arithmetic step cruder.

The money-weighted mechanism is a discount rate. One rate that, applied to every dated cash flow and the closing value, reconciles them. That is an internal rate of return; computed from actual dates rather than even periods it is what a spreadsheet calls XIRR, and it is the same quantity whether a product labels it IRR, XIRR, money-weighted or dollar-weighted. GIPS requires such returns to be annualised since inception and calculated using daily external cash flows.

The consequence of the two definitions is the whole of the term: on an account you have been adding to, the two numbers are different, and neither is a mistake. A deposit made just before a fall drags the money-weighted figure down and leaves the time-weighted one untouched, because the first is measuring your money and the second is measuring the holdings.

The standard picks one, and says when

Worth knowing because it explains which figure professional reporting defaults to. Under the 2020 GIPS standards a firm must present time-weighted returns, and may present money-weighted returns only where it controls the external cash flows into the portfolios and the composite or fund is closed-end, fixed life, fixed commitment, or has illiquid investments as a significant part of the strategy. Switching between the two is not silent either: a firm changing from one type to the other must disclose the change.

That is the reverse of a private investor's situation, which is the point. You control your own cash flows entirely, so the figure that describes your account is the one the standard treats as the exception.

Why it matters here

This is the single most common reason a tracker and a broker show different returns for the same account on the same day, and the products in portfolio trackers genuinely differ on which they compute. Sharesight reports money-weighted only — its own term is dollar-weighted, computed with a variation of the Modified Dietz method rather than IRR, on the documented reasoning that time-weighted return is for judging fund managers rather than investors — so its headline percentage is not comparable with a fund's published figure at all. Portseido and Wealthfolio report both. Snowball Analytics shows IRR and TWR side by side, and getquin puts TTWROR charts and IRR behind its paid tier, TTWROR being the same time-weighted idea computed off a valuation at each cash flow.

What almost nothing does is label the headline number on the dashboard. So the question to take to a help page is not which method is better but which one this figure is, and — for a time-weighted figure — whether the portfolio is revalued at each cash flow or approximated by weighting the flows. Two products applying the two mechanisms above to identical transactions will disagree by more than a rounding error on any account that has been funded over time, and until you know which is which there is nothing to reconcile.