Time-Weighted vs. Money-Weighted Return
Manager performance versus the investor's actual experience.
What is Time-Weighted vs. Money-Weighted Return?
Time-weighted return strips out the effect of deposits and withdrawals, so it measures the manager. Money-weighted (dollar-weighted, an IRR) includes cash-flow timing, so it measures what the investor actually earned. They can differ sharply when large contributions land at market extremes.
Time-Weighted vs. Money-Weighted Return: a worked example
A fund posts a 10% time-weighted return, but an investor who added heavily at the peak has a money-weighted return near zero.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Efficient Market Hypothesis
Prices already reflect available information.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.