How to Calculate a Time Weighted Rate of Return

Time weighted rate of return, or TWR, is one of the most popular metrics in the industry for measuring portfolio performance. It’s also a great way to measure your returns over time and compare different investment managers.

TWR is a form of investment return measurement that calculates the overall return of an investment portfolio using daily valuations from market days. The rates generated are geometrically linked to create an average annual return for the period.

This is a better way to compare portfolios, and it’s often considered the gold standard for measuring performance by investment managers. It isn’t perfect, but it can provide a thorough accounting of the growth of your investments.

It’s a bit complicated to calculate, so it can be helpful to have an online calculator or computational software available for reference. It’s important to remember that TWR isn’t a perfect measure of your return, as it takes into account all cash flow differences in and out of a portfolio, but it can be useful for comparing performance among different investments.

To calculate a TWR, you need to break the measurement period into sub-periods when cash inflows or outflows occur. These sub-periods must be similar and the same in order to compare the results of different portfolios or investments, so you need to mark the start of each new sub-period with a valuation of the investment for that particular day.

The returns of each of these sub-periods must be multiplied together, and then the result is used to calculate the overall period return. This is a more accurate measure of your returns than simply taking the beginning balance and ending balance from the entire time period you were invested in a fund.

There are two primary ways to calculate https://www.eastportfinancialgroup.com/keel-magazine/financial-planning/time-weighted-vs-money-weighted-rates-of-returns the performance of an investment portfolio: money-weighted and time-weighted. Both of these methods are acceptable and valid, but each has different uses.

True Time-Weighted Rate of Return

A true time-weighted rate of return is a more precise way to calculate the return of an investment portfolio, because it doesn’t take into account cash inflows and outflows. This is different than the money-weighted rate of return, which is sensitive to cash flows and accounts for all cash flow differences in and out of underlying portfolios.

Calculating a True Time-Weighted Rate of return is not easy, as it requires the use of daily valuations for each market day and the geometric linking of these values to create an annual return for the period. However, it is a very accurate measure of performance that is used extensively in the investment industry and for assessing a portfolio’s performance.

If you’re looking for a more accurate measure of your return, consider finding a financial advisor who can help you track your progress and reach your goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview them at no cost to decide which one is the best fit for your needs.