What is Time-Weighted Return?
Time-weighted return (TWR) measures investment performance by neutralizing the effect of deposits and withdrawals. It divides the investment period into sub-periods at each cash flow event, calculates the return for each sub-period, then geometrically links them. This isolates the fund manager's skill from the investor's timing decisions. TWR is the standard required by GIPS (Global Investment Performance Standards) for reporting fund performance.
TWR vs. Money-Weighted Return
Money-weighted return (MWR), also called internal rate of return, accounts for the timing and size of cash flows, reflecting the investor's actual experience. If a fund returns +10% in January and -5% in February, the TWR is approximately +4.5%. But an investor who added a large sum at the end of January experiences the February decline on a much larger base, potentially producing a negative MWR. TWR measures the fund; MWR measures the investor.
Why This Matters for Individual Investors
Fund fact sheets report TWR, but your personal return is MWR. Research by Dalbar shows that average investors earn 2-3% less annually than the funds they invest in, because they add money after strong performance and withdraw after declines. This gap between TWR and MWR represents the cost of behavioral mistakes. Systematic investing through automatic contributions minimizes this gap by removing emotional timing decisions from the equation.