Accurately measure your investment manager's performance by eliminating the distorting effects of cash inflows and outflows.
The value of the portfolio at the beginning of the analysis.
Please enter a positive number.
Period 1
Portfolio value at the end of Period 1, before any deposits/withdrawals.
Positive for deposits, negative for withdrawals happening between Period 1 and 2.
Period 2
Portfolio value at the end of Period 2, derived from (Period 1 Value + Cash Flow) ± Gains.
Period 3
Final value of the portfolio at the end of the analysis.
Total Time Weighted Return (TWR)
27.05%
Period 1 Return
10.00%
Period 2 Return
10.00%
Period 3 Return
5.00%
Formula Used: TWR = [(1 + r1) × (1 + r2) × (1 + r3)] – 1
Where rn is the holding period return for each sub-period between cash flows.
Period
Start Value ($)
End Value (Pre-Flow) ($)
Period Return (%)
Cash Flow ($)
Table 1: Detailed breakdown of calculating time weighted return across sub-periods.
Figure 1: Comparison of individual Period Returns vs. Cumulative Time Weighted Return.
What is Calculating Time Weighted Return?
Calculating time weighted return (TWR) is the industry-standard method for measuring the performance of an investment portfolio. Unlike simple percentage gains or "money-weighted" returns (like IRR), TWR eliminates the distorting effects of external cash flows—such as deposits and withdrawals—that are often outside a fund manager's control.
For individual investors and financial advisors, calculating time weighted return is crucial because it answers the question: "How well did the investment strategy perform?" rather than "How much money did I make?" (which is heavily influenced by when you added money).
This metric is widely used by mutual funds, ETFs, and wealth managers to report performance figures that are comparable across different funds, regardless of the size or timing of client contributions.
Time Weighted Return Formula and Mathematical Explanation
The core concept of calculating time weighted return involves breaking the total investment timeframe into distinct sub-periods. A new sub-period begins every time a significant cash flow enters or exits the portfolio.
The calculation follows a geometric linking process (chain-linking). Here is the step-by-step logic:
Calculate Holding Period Return (HPR) for each sub-period:
HPR = (End Value – Start Value) / Start Value (Note: The "End Value" is the portfolio value before the cash flow occurs).
Table 2: Key variables used in calculating time weighted return formula.
Practical Examples (Real-World Use Cases)
Example 1: The "Lucky" Deposit
Imagine an investor starts with $10,000. In Period 1, the market stays flat (0% return), ending at $10,000. They then deposit $90,000, making the balance $100,000. In Period 2, the market rises 10%, ending at $110,000.
Money Weighted Return (IRR): Would be very close to 10% because most of the money ($90k) earned 10%.
Time Weighted Return:
Period 1: ($10k – $10k)/$10k = 0%
Period 2: ($110k – $100k)/$100k = 10%
Total TWR: (1.00 × 1.10) – 1 = 10%
Example 2: The High Volatility Scenario
Start with $100,000.
Period 1: Portfolio drops to $50,000 (-50%). Investor panics and withdraws $10,000. New Basis: $40,000.
Period 2: Portfolio recovers to $80,000 (+100% gain on the $40k).
Calculating Time Weighted Return: Period 1 Return: -50% (Factor 0.5)
Period 2 Return: +100% (Factor 2.0)
TWR = (0.5 × 2.0) – 1 = 0.00%.
Even though the investor lost money in absolute terms (Started with $100k, withdrew $10k, ended with $80k -> Net loss of $10k), the manager's performance (TWR) is 0% because the 100% gain mathematically offset the 50% loss. This highlights why TWR separates manager skill from client timing.
How to Use This TWR Calculator
Enter Initial Value: Input the starting balance of your account.
Input Period Details: For each period, enter the value of the portfolio just before a deposit or withdrawal occurred.
Enter Cash Flows: Enter deposits as positive numbers and withdrawals as negative numbers.
Review Results: The calculator instantly computes the return for each sub-period and links them to show the cumulative TWR.
Analyze the Chart: Use the visualization to see if specific periods dragged down or boosted the overall performance.
Key Factors That Affect TWR Results
Timing of Valuation: Accurate TWR requires valuing the portfolio on the exact day a cash flow occurs. Using monthly approximations can introduce slight errors.
Frequency of Cash Flows: High-frequency trading or daily deposits/withdrawals make manual TWR calculation difficult, requiring specialized software.
Management Fees: Returns can be calculated "Gross" (before fees) or "Net" (after fees). Ensure you know which inputs you are using.
Dividend Reinvestment: If dividends are reinvested, they are not considered external cash flows; they remain part of the internal growth of the portfolio.
Inflation: TWR is a nominal return. To find the "Real TWR", you must adjust the final result for inflation (CPI).
Market Volatility: Significant losses in early periods (sequence of return risk) require much larger percentage gains in later periods to recover to breakeven TWR.
Frequently Asked Questions (FAQ)
What is the difference between TWR and IRR?
IRR (Internal Rate of Return) is money-weighted; it gives more weight to periods where the account balance is higher. TWR treats every period equally, regardless of account size. TWR measures strategy; IRR measures personal wealth growth.
Why is calculating time weighted return better for fund managers?
It is fairer. A manager cannot control when clients deposit or withdraw money. TWR ensures they aren't penalized if a client withdraws money right before a bull market.
Can TWR be negative while my account balance grew?
Yes. If you make a massive deposit and the market drops slightly, your balance might be higher than the start, but TWR will be negative because the underlying assets lost value.
Does TWR account for taxes?
Generally, no. TWR is usually calculated on pre-tax returns unless specifically adjusted for tax drag.
How often should I calculate TWR?
Professionals calculate it daily. For personal tracking, calculating it whenever you make a deposit or withdrawal (or monthly) is sufficient.
What is a good Time Weighted Return?
A "good" TWR depends on your benchmark (e.g., S&P 500) and risk profile. Outperforming your benchmark over a 3-5 year cycle is generally considered good performance.
Is Simple Return ever better than TWR?
Only if there are absolutely no cash flows (deposits/withdrawals). In that specific case, Simple Return = TWR = IRR.
How do I handle dividends in this calculator?
If dividends are reinvested automatically, ignore them—they are part of the ending value. If you withdraw dividends as cash, treat them as a negative cash flow.
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