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What is Time-Weighted Return (TWR) and how is it calculated?

Time-Weighted Return (TWR) measures how your portfolio performs by removing the impact of deposits and withdrawals. It reflects the true investment performance, regardless of when or how much you add or withdraw.

TWR calculates the return between each cash flow, isolating investment performance from contribution timing or size.

Why do we use TWR?

Most investors top up their portfolios at different times with different amounts. Because of this, it’s hard to measure pure performance using simple returns.

TWR solves this by:

  • Eliminating time distortion: Each investment is considered for the time it was actually in the market.
  • Providing a fair benchmark: You can accurately compare your portfolio’s performance against benchmarks or other investments.

How is TWR calculated?

TWR is calculated using the formula below:

TWR = [(1 + HP¹) × (1 + HP²) × … × (1 + HPⁿ)] – 1

Where:

  • TWR = Time-Weighted Return
  • n = Number of time periods
  • HPⁿ = Holding period return for period “n”
  • HP = (End Value – Initial Value + Cashflow) / (Initial Value + Cashflow)

Alternative: Money-Weighted Return (Cumulative Return)

Money-Weighted Return (MWR), or Cumulative Return, measures total profit or loss based on your actual contributions.

It’s ideal for simple portfolios with a single investment.

Example:

You invest $10,000, , and it grows to $15,000 after a year.

Cumulative return = 50%

Example: Positive Gain but Negative TWR

  • You invest $1,000 on 1 Jan 2018.
  • By 30 Jun 2018, your portfolio drops 10% to $900.
  • You then top up $10,000.
  • By 31 Dec 2018, your portfolio grows 5% to $11,445.

Total contributions = $1,000 + $10,000 = $11,000

Ending value = $11,445

TWR = (1 - 10%) × (1 + 5%) - 1 = -5.5%

Cumulative gain = $445 (from $11,000 total invested to $11,445 ending value)

This means your portfolio value increased, but TWR is negative because your first investment period saw a loss.

Opposite Case: Positive TWR but Negative Gain

If your portfolio gains early on, and you withdraw a large portion before a market decline,

  • TWR may remain positive,
  • but your overall dollar return may turn negative if the ending value falls below your total contributions.