Time-weighted return (TWR)

Time-weighted return (TWR) measures the compound growth rate of a portfolio's underlying investments, stripping out the effect of when and how much money an investor added or withdrew. It is the standard way to judge a manager's or strategy's investment skill, because it answers "how did the investments perform" independent of the investor's own cash-flow timing.

TWR is calculated by breaking the period into sub-periods at each cash flow, computing the return for each sub-period, and geometrically linking them: TWR = [(1+R1) × (1+R2) × ... × (1+Rn)] - 1. This differs from a money-weighted return, which does incorporate the size and timing of an investor's own contributions and withdrawals, and can diverge sharply from TWR when large deposits or withdrawals happen right before strong or weak periods.

TWR is the required standard for comparing fund managers and reporting composite performance under industry standards such as the Global Investment Performance Standards (GIPS), because it is not distorted by client-level cash-flow decisions the manager does not control. It is typically shown against a benchmark index to judge relative skill. The pitfall is applying TWR to judge an individual investor's actual personal experience: for that purpose, money-weighted return is more informative, since it reflects the impact of that investor's own timing decisions.