Time-Weighted vs. Money-Weighted Return

Two traders end the year with the exact same account balance. One brags about a 20% year. The other swears they barely broke even. Both are right. They are just answering two different questions, and they picked two different return methods without knowing it.

This is the split between time-weighted return (TWR) and money-weighted return (MWR). It is one of the most common sources of confusion in performance measurement, and it explains why the number your broker shows you rarely matches the number an index tracker shows for the same period. Neither method is wrong. Each answers a specific question, and using the wrong one leads you to reward or blame yourself for the wrong thing.

Below is a worked example on identical cash flows, so you can watch the same account produce two very different numbers, and a clear rule for which to trust.

TL;DR

• Time-weighted return measures how your strategy performed, stripping out the effect of when you added or withdrew cash.
• Money-weighted return measures what you actually earned on the dollars you had invested, giving heavier weight to periods when your account was largest.
• With no deposits or withdrawals in the period, the two are identical.
• Add cash right before a drawdown and money-weighted return drops below time-weighted return. Add cash right before a rally and it climbs above.
• Use time-weighted to judge your edge. Use money-weighted to judge your wallet.

What time-weighted return actually measures

Time-weighted return isolates the performance of your holdings from your funding decisions. It answers: "If I had put in one dollar at the start and never touched it, what would each dollar have done?"

The mechanism is straightforward. You break the period into sub-periods, cutting a new sub-period every time cash flows in or out. You calculate the plain return inside each sub-period, then chain those sub-period returns together geometrically. Because the calculation resets at every cash flow, the size and timing of your deposits never touch the result. Only the performance of the underlying positions does.

That chaining is why it is called time-weighted: each sub-period is weighted by its length in time, not by how many dollars were sitting in the account. This is the method behind the returns that funds and indices publish. The Global Investment Performance Standards (GIPS) from the CFA Institute require time-weighted return for reporting portfolio performance precisely because it removes the distorting effect of client-driven cash flows, which lets one manager's results be compared fairly against another's.

If you want the full mechanics of the sub-period chaining, we cover it in time-weighted return explained. For this post, the key property is the one that matters: your funding decisions are invisible to it.

What money-weighted return actually measures

Money-weighted return does the opposite. It bakes your funding decisions right into the number. It answers: "Given the actual dollars I had invested at each moment, what rate did my capital compound at?"

Mathematically, money-weighted return is the internal rate of return (IRR) of your account. It is the single rate that makes the present value of every cash flow (deposits count as outflows from your pocket, withdrawals and ending value as inflows) net to zero. Because it treats the account as one stream of cash in and out, periods when you had more money invested count for more. A great month while you were holding $50,000 moves the number far more than an identical month while you were holding $5,000.

This is the method most brokerages use for the "personal rate of return" or "your return" figure on your statement. Vanguard, for instance, notes that fund companies report performance "assuming someone made a lump-sum investment on the first day of the reporting period and then did nothing," and that your personal experience differs mainly because of the timing of your own investments, fees, and taxes. That timing effect is exactly what money-weighted return captures and time-weighted return throws away.

A worked example on the same cash flows

Numbers make this concrete. Consider one account across two equal sub-periods with a single deposit in the middle.

• Start: you fund the account with $10,000.
• Sub-period 1: your positions rise 20%. The balance grows to $12,000.
• The deposit: you add $8,000, feeling confident. Balance is now $20,000.
• Sub-period 2: the market pulls back 10%. Your $20,000 falls to $18,000.

You contributed $18,000 in total ($10,000 plus $8,000) and the account ends at exactly $18,000. Net dollars gained: zero. Now watch the two methods disagree.

Time-weighted return chains the two sub-period returns and ignores the deposit:

• Sub-period 1 return: +20% (10,000 to 12,000)
• Sub-period 2 return: −10% (20,000 to 18,000)
• TWR = (1 + 0.20) × (1 − 0.10) − 1 = 1.20 × 0.90 − 1 = +8.0%

Your strategy genuinely made money. Up 20%, then down 10%, compounds to +8% regardless of how much cash was riding on each leg.

Money-weighted return is the IRR that ties the cash flows together. Solve for the rate r where 10,000 × (1 + r)² + 8,000 × (1 + r) = 18,000. The answer is 0.0%.

Same account. Same trades. Same ending balance. Time-weighted says +8%. Money-weighted says 0%. The gap is entirely explained by one decision: you put your largest deposit to work right before the 10% drawdown, so the drop hit more dollars than the earlier gain did. Time-weighted return does not see that. Money-weighted return is built around it.

Why the two numbers diverge

The direction of the gap tells you a story about your timing. Once you see the pattern, you can read it off any statement.

• You add cash right before a good stretch. Your largest balance rides the rally. Money-weighted return climbs above time-weighted return. Your timing helped.
• You add cash right before a bad stretch. Your largest balance eats the drawdown, exactly like the example above. Money-weighted return falls below time-weighted return. Your timing hurt.
• You make no deposits or withdrawals at all. There is nothing for timing to distort, so the two methods return the same number. This is the one case where the debate disappears.

Corporate Finance Institute frames the practical takeaway cleanly: money-weighted return "is heavily influenced by the timing of cash flows," which is why a single large contribution before a strong period can pull it well above the underlying strategy return, and a contribution before a weak period drags it well below.

This is also why comparing your money-weighted personal return against an index return is a category error. The index return is time-weighted. If you dollar-cost-averaged in through the year, your money-weighted number will differ from the index even if you held nothing but that index. The difference is not your fund choice. It is your funding schedule. This is one of the traps we unpack in why simple return is misleading: a single headline percentage hides which question it is even answering.

Which one should you actually use?

The honest answer is both, for different jobs. They are complementary, not competing.

Use time-weighted return to judge your strategy or your edge. When you want to know whether your system, your setups, or a particular market call actually worked, you need to strip out the noise of when you happened to have cash on hand. TWR is the clean signal. It is also the number to use when comparing yourself against a benchmark, another trader, or your own past periods, because it is the same basis those published returns use.

Use money-weighted return to judge your real-world outcome. When you want to know what your capital actually did, including the quality of your timing decisions about when to deploy and when to pull back, MWR is the truth. It reflects the return on the dollars you truly had at risk. If your money-weighted return is consistently well below your time-weighted return, that is a signal worth investigating: you may have a habit of adding size at the wrong moments, and that habit is costing you real money even when your strategy is sound.

A large gap between the two is itself information. Time-weighted tells you the trade selection was fine. Money-weighted tells you the sizing and timing were not. Reviewing them side by side turns a vague feeling of "I never seem to make what my win rate suggests" into a concrete, measurable pattern.

Getting the underlying data right

Both methods lean on the same foundation: accurate, complete cash-flow data. A time-weighted return needs a clean cut at every deposit and withdrawal, and a money-weighted return needs every one of those flows dated correctly to solve the IRR. Miss a transfer or misdate a fee and both numbers drift. So before you argue over which method to trust, log every deposit, withdrawal, and fee. A journal that tracks your positions and cash flows on a time-weighted basis (TradeReveal is one) gives you a clean read on how your holdings performed, independent of the cash you moved in and out.

Frequently Asked Questions

Which is better, time-weighted or money-weighted return?

Neither is universally better. They answer different questions. Time-weighted return is better for judging strategy performance and comparing against benchmarks or other traders. Money-weighted return is better for measuring what your actual capital earned, including the effect of your deposit and withdrawal timing. Serious performance review uses both.

Why is my broker's return different from the index return?

Most brokers report a money-weighted (personal) rate of return, while an index publishes a time-weighted return. If you added or withdrew cash during the period, the two will differ even if you held exactly the index. The gap reflects the timing of your cash flows, not a difference in what you were invested in.

Is money-weighted return the same as IRR?

Yes. The money-weighted rate of return is the internal rate of return (IRR) of your account's cash flows. It is the single discount rate that sets the net present value of all deposits, withdrawals, and the ending balance to zero.

When do the two methods give the same answer?

When there are no external cash flows during the period, time-weighted and money-weighted returns are identical. With no deposits or withdrawals, there is no timing effect for the money-weighted method to capture, so both simply reflect the performance of the holdings.

Why do GIPS standards require time-weighted return?

Because cash flows into and out of a portfolio are usually driven by the client, not the manager. Removing that effect with a time-weighted calculation isolates the manager's skill and makes returns comparable across firms. The CFA Institute's GIPS standards permit money-weighted return only in specific cases, such as when the firm controls the cash flows and the portfolio is closed-end or holds significant illiquid assets.

Final Thoughts

The next time two accounts with the same balance report different returns, you will know why. One is measuring the strategy. The other is measuring the strategy plus the timing of every dollar that moved. The trap is not that one number lies. The trap is reading a single number without asking which question it answers.

Keep both in view. Let time-weighted return tell you whether your edge is real, and let money-weighted return tell you whether your timing is helping or quietly draining that edge away. Both start from the same place: an accurate, complete record of every trade and every cash flow. Get that record right, and the two numbers stop being confusing and start being two honest views of the same year.

Start your free TradeReveal account today

Happy Trading,

The TradeReveal Team

Sources

• CFA Institute, Overview of the Global Investment Performance Standards (GIPS)
• Corporate Finance Institute, Money-Weighted Rate of Return (MWRR)
• The Vanguard Group, Checking your portfolio performance
• Wikipedia, Time-weighted return