Do You Know the Difference Between Money-Weighted and Time-Weighted Returns?
When you open your investment statement, you may notice two different performance numbers. They can look quite different – sometimes dramatically so – even though they describe the same account over the same period. This is not an error. It reflects the fact that investment returns can be measured in more than one way, and each method answers a different question.
Understanding both figures will help you interpret your results with confidence and have more informed conversations with your advisor.
Two Questions, Two Answers
Think of it this way: there is how the investments performed, and there is how your particular dollars performed. Both figures are accurate. They simply measure different things.
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Time-Weighted Return |
Money-Weighted Return |
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Also known as: |
Also known as: |
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TWR |
MWR / IRR (Internal Rate of Return) |
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The key question it answers: |
The key question it answers: |
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How did the investment strategy perform? |
How did my actual dollars perform? |
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What it measures: |
What it measures: |
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Performance of the portfolio itself, independent of cash flow timing |
Your personal experience — affected by when you deposited or withdrew money |
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Best used for: |
Best used for: |
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Comparing your portfolio to market benchmarks and indices |
Understanding the real-world impact on your wealth |
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Regulatory requirement: |
Regulatory requirement: |
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Not required on client statements in Ontario |
Required on annual statements under NI 31-103 (Ontario) |
Time-Weighted Return: Evaluating the Strategy
Time-weighted return (TWR) measures the performance of the investment strategy itself. It does this by removing the effect of cash flows – any money you deposited into or withdrew from the account – so that the calculation reflects only what the portfolio’s underlying investments actually did.
Because it sets the timing of your contributions aside, TWR is the standard measure used to compare investment managers against market benchmarks and indices. If you want to know how your portfolio performed relative to, say, the S&P/TSX Composite, TWR is the right number to use.
A straightforward way to think about it: TWR answers the question, “If I had simply left a single dollar invested throughout the entire period, how would it have grown?”
Money-Weighted Return: Your Personal Experience
Money-weighted return (MWR) – also called the Internal Rate of Return, or IRR – tells a different story. It reflects the actual impact on your dollars, taking into account how much you invested and precisely when those funds were put to work.
If you added a large sum just before the market rose, your MWR will be higher than the TWR, because your dollars were there to capture the gain. Conversely, if you invested a significant amount right before a downturn, your MWR may be lower, because your money bore the full weight of the decline.
In short: MWR answers the question, “Given exactly when and how much I invested, what return did my actual money earn?”
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Required by Ontario regulators Under National Instrument 31-103, investment firms registered in Ontario – including portfolio managers like Access Family Office – are required to report the money-weighted return on your annual account statement. This regulatory requirement exists because MWR reflects your actual experience as a client, rather than the performance of the strategy in the abstract. |
Why the Numbers Can Sometimes Look Surprising
The money-weighted return is expressed as an annualized rate. This means it describes performance as though the same pace of gain or loss continued for a full twelve months – even if your money was only invested for a short time.
When funds are invested for only a brief period, this annualization can make a small, real change appear as a much larger percentage. Consider a straightforward example:
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A Practical Example Suppose you fund a new account in mid-December. Over those two weeks, the market slips by approximately 1.1%. On a $100,000 balance, that represents a real decline of roughly $1,100 – the actual change to your money. However, because the money-weighted return annualizes that two-week move, the same $1,100 dip can appear on your statement as approximately −18%. Your money did not fall 18%. It fell roughly 1%. The −18% is the annualized lens through which that brief period is reported, not the magnitude of the loss. |
This is why we always encourage clients to look at the actual change in account value first – the dollar amount gained or lost – alongside the percentage figures. For accounts with a short history, or accounts that received large contributions close to a reporting period, the annualized MWR can be particularly sensitive to this effect.
How to Read Your Performance Report
When reviewing your statements and portal, keep the following in mind:
- Start with the dollar figures. The change in your account value gives you the clearest picture of what actually happened to your money.
- Use time-weighted return to evaluate the strategy. This is the most appropriate figure for comparing your portfolio’s performance to market indices and benchmarks.
- Interpret money-weighted return in context. For accounts that are new, or that received significant contributions late in the year, the annualized MWR can amplify a small move. This does not mean the figure is wrong – it is correctly calculated – but it benefits from context.
- Both figures belong on your statement. They complement each other rather than contradict. TWR tells you how your advisor-managed strategy is performing. MWR tells you how your personal wealth journey is unfolding.
Questions? We’re Here to Help.
Performance numbers should empower you, not confuse you. If you ever open your statement and a figure raises a question, please reach out. We are always glad to walk through your numbers with you in detail, explain what is driving a particular result, and make sure you have a complete picture of where your portfolio stands.