What Is Time-Weighted Return (TWR)? Formula and Example

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The time-weighted return (TWR), also called the time-weighted rate of return (TWRR), measures the compound growth rate of a portfolio while removing the effect of money added to or withdrawn from it. It splits the measurement period at every external cash flow, calculates the return for each piece, and links those returns geometrically. The result shows how the investments performed, regardless of when or how much money the investor moved in or out.

How Time-Weighted Return Works

A simple percentage change in portfolio value mixes two things: what the investments earned and what the owner contributed. If you start with $100,000 and end with $150,000, the portfolio did not return 50% if $40,000 of that came from a deposit.

TWR solves this by treating each stretch between cash flows as its own mini-period. Within each sub-period no money enters or leaves, so the change in value comes entirely from investment performance. Linking the sub-periods compounds those pure performance figures across the full period.

Calculating Time-Weighted Return

The calculation takes three steps:

1. Identify the sub-periods. A new sub-period begins each time a deposit or withdrawal occurs.
2. Calculate each sub-period return (HP). Measure the change in value before the next cash flow affects it.
3. Link the returns geometrically. Multiply the growth factors and subtract 1.

Formula:

TWR = [(1 + HP₁) × (1 + HP₂) × … × (1 + HPₙ)] − 1

Where:

• n = number of sub-periods
• HPₙ = return for sub-period n
• HP = (End Value − Cash Flow) / Beginning Value − 1, when the cash flow arrives at the end of the sub-period

The cash flow timing assumption matters. If money arrives at the start of a sub-period, it belongs in the denominator instead: HP = End Value / (Beginning Value + Cash Flow) − 1. Using the wrong convention credits the deposit as investment gain or loss.

In a spreadsheet, the linking step is a product of (1 + return) cells minus 1. Multiple share purchases work the same way: each purchase is a cash flow that starts a new sub-period, and the portfolio’s market value is recorded just before it.

Interpreting Time-Weighted Return

TWR answers the question “How did $1 invested at the start and left untouched have grown?” Two investors in the same fund over the same dates get the same TWR even if one invested $1,000 and the other added $1 million halfway through. That is why published fund returns, typically based on changes in net asset value (NAV) with distributions reinvested, describe the fund rather than any one shareholder.

TWR over several years can be annualized: (1 + TWR)^(1/years) − 1. That annualized figure has the same structure as the compound annual growth rate (CAGR).

Example of Time-Weighted Return

Hypothetical example; all figures are illustrative. A portfolio starts at $100,000. Cash flows happen at the end of each quarter, after the quarter’s return.

Sub-period returns:

• Q1: $110,000 / $100,000 − 1 = 10%
• Q2: $152,000 / $160,000 − 1 = −5%
• Q3: $138,600 / $132,000 − 1 = 5%

TWR = (1.10 × 0.95 × 1.05) − 1 = 1.09725 − 1 = about 9.7% over the nine months.

Compare that with the misleading shortcut. Ending value divided by starting value is $138,600 / $100,000 − 1 = 38.6%, but most of that came from the investor’s own net $30,000 contribution. In dollar terms, the investor put in $130,000 net and ended with $138,600, a gain of $8,600.

The money-weighted return for the same cash flows (the internal rate of return on −$100,000, −$50,000, +$20,000 and +$138,600 at quarterly intervals) works out to roughly 2.2% per quarter, or about 6.8% compounded over the three quarters. It is lower than the TWR because the investor added $50,000 just before the losing quarter. The investments delivered 9.7%; the investor’s timing pulled their personal result down to about 6.8%.

Why Is Time-Weighted Return Important?

Fund managers usually do not control when clients invest or redeem. Judging them on a dollar-weighted figure would reward or penalize them for client behavior. TWR isolates the part they do control: security selection and allocation.

This makes TWR the basis for:

• Manager comparisons. Funds of different sizes and with different flow patterns can be compared on the same footing.
• Benchmarking. Index returns such as the S&P 500 are effectively time-weighted, so a portfolio must be measured the same way to judge whether it beat the market. The difference feeds into measures like alpha and the Sharpe ratio.
• Industry reporting standards. The CFA Institute’s Global Investment Performance Standards (GIPS) generally call for time-weighted returns, while permitting money-weighted returns in cases where the manager controls the cash flows, as in many private equity and venture capital funds.

Financial advisors also use TWR to show clients how the chosen strategy performed, separately from how the client’s deposits and withdrawals affected their balance.

Limitations of Time-Weighted Return

• It is not your personal return. TWR ignores how much money was invested when. An investor who bought heavily before a decline earns less than the TWR suggests; one who added money before a rally earns more. A brokerage “personal rate of return” is meant to capture that experience, which puts it in the money-weighted family.
• It needs a valuation at every cash flow. A true TWR requires the portfolio’s market value on each deposit or withdrawal date. When only monthly or quarterly values exist, firms approximate sub-period returns with methods such as Modified Dietz, which weights each flow by the time it was invested.
• Illiquid assets weaken it. If holdings are hard to price, sub-period values and therefore the linked return are only as reliable as the appraisals behind them.
• Fees and taxes must be specified. A TWR can be gross or net of fees and is usually pre-tax. Two figures are comparable only if they use the same basis.

Distinctions Readers Often Confuse

TWR vs. money-weighted return (MWR). MWR is the internal rate of return on all cash flows, so larger balances carry more weight. TWR gives every sub-period equal weight regardless of the balance. When there are no external cash flows, the two are equal.

TWR vs. simple return or ROI. Return on investment compares gain with cost and does not separate contributions from performance across multiple flows.

TWR vs. an average of sub-period returns. A “time-weighted average” is not an arithmetic mean. A portfolio that gains 50% and then loses 50% has an arithmetic average of 0%, but its TWR is (1.5 × 0.5) − 1 = −25%, which matches what actually happened to $1.

FAQs

The Bottom Line

TWR matters most to anyone comparing fund managers, checking a portfolio against a benchmark index, or reading published fund returns, because it isolates investment decisions from client cash flows. Investors who want to know what they earned in dollars should look at a money-weighted return instead, since the timing of their own deposits and withdrawals can push that result above or below the TWR. Two TWR figures are comparable only when both use the same fee basis.