Time-weighted vs money-weighted return
Two honest ways to answer "what did I make", giving different numbers. One measures the investments, the other measures your timing. Here is which is which.
On this page
Ask what a portfolio returned and there are two defensible answers. They disagree, sometimes dramatically, and neither is wrong.
Time-weighted return measures how the investments performed, ignoring when you put money in. It is what you would compare against an index.
Money-weighted return measures how you did, including the effect of when you invested. It is what your bank balance experienced.
Why they differ
Suppose you hold a fund that falls 50% and then doubles. Over the whole period the fund is flat, and its time-weighted return is 0%.
Now suppose you invested a small amount at the start and a large amount at the bottom, just before it doubled. Your money-weighted return is strongly positive, because most of your money was present for the recovery and very little of it was present for the fall.
Both statements are true. The fund went nowhere. You did well. Time-weighted answers the first, money-weighted answers the second.
How Gylder calculates money-weighted return
The money-weighted figure is an internal rate of return, solved from your actual cashflows using the same convention as Excel's XIRR:
- Buys are money flowing in, entered as negative
- Sells and dividends are money flowing out to you, entered as positive
- The value at the start of the period counts as money in, the value at the end as money out
Gylder solves for the annual rate that makes those flows net to zero.
The equation only has a solution when there is at least one inflow and one outflow. If your cashflows never change sign, or the data is pathological, the figure shows a dash rather than a confident wrong number.
Which to use
Use time-weighted when comparing against a benchmark, or judging a fund or a strategy, since it removes the effect of contribution timing that has nothing to do with the investment itself. Everything in the risk grid is built from the time-weighted value series for this reason.
Use money-weighted when asking what your actual money earned, especially if you contribute regularly. For anyone paying in monthly, this is usually the more honest answer to "how am I doing".
A caveat
Holdings you entered by hand have no cashflow ledger, only the valuations you typed. They are excluded from the contribution-based return rather than being given invented flows, so a portfolio heavy in manual entries will have a money-weighted figure covering less than all of it.
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