Time-weighted return

A return computed by cutting the period at every cash flow, measuring each segment separately and multiplying the segments together, so that the size and timing of contributions do not affect the answer.

Example

A year of +25% followed by a year of -20% is 1.25 x 0.80 - 1 = 0.00%, whatever was added in between.

Important

It measures the holdings, not the investor. It is the fair way to judge a manager who does not control when money arrives, and it is not a claim about what any particular investor experienced.

Related terms

• Money-weighted return — The single rate at which every contribution, withdrawal and the closing value balance - an IRR applied to a portfolio rather than to a deal.
• CAGR (compound annual growth rate) — The single steady annual growth rate that would take a starting value to an ending value over a given number of years.
• Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.

Lessons that explain it

• Time-weighted and money-weighted: two true answers — One measures the decisions about what to hold; the other measures what actually happened to your money, including when you added it. They can disagree enormously. (13 min)

All 578 terms in the Investing glossary