Understanding Time-Weighted vs. Dollar-Weighted Returns
Two different ways of measuring investment performance, and why they can tell different stories.
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What to remember
- Time-weighted return measures the investment itself; dollar-weighted return measures an investor's own realized experience.
- The two can diverge substantially depending on deposit and withdrawal timing.
- Each is more appropriate for a different specific question.
Two genuinely different questions
Time-weighted return measures how an underlying investment itself performed, independent of when money was added or withdrawn. Dollar-weighted return measures an individual investor's actual realized return, which depends heavily on the specific timing and size of their own deposits and withdrawals.
Why they can diverge
An investor who added a large deposit shortly before a decline, or withdrew funds shortly before a rally, will have a dollar-weighted return that differs — sometimes substantially — from the underlying investment's own time-weighted performance, even though both are describing the same investment.
When each is more useful
- Time-weighted return is generally more useful for evaluating an investment or strategy's own performance, independent of any specific investor's behavior.
- Dollar-weighted return is generally more useful for understanding an individual investor's own actual realized experience.
Comparing the wrong return type can be misleading
Comparing your own dollar-weighted return to a strategy's published time-weighted return isn't quite an apples-to-apples comparison — the difference can come entirely from your own deposit/withdrawal timing, not the strategy's underlying performance.
What to remember
- Time-weighted return measures the investment itself; dollar-weighted return measures an investor's own realized experience.
- The two can diverge substantially depending on deposit and withdrawal timing.
- Each is more appropriate for a different specific question.