Money-Weighted Return vs. Time-Weighted Return
Several years back, new regulations came into force that required our industry to share with clients a second type of investment return called the money-weighted return. Previously, only the time-weighted return was required.
Though required to report the money-weighted return only once a year, we have decided to include both the time-weighted and money-weighted return to our clients in each monthly report that we distribute.
The difference between the two types of returns is cash flow.
The time-weighted return shows you how the underlying investments have performed over time. It strips out the effects of deposits and withdrawal that you make in your portfolio.
The money-weighted return shows you how your portfolio has performed from a dollars and cents perspective, taking into account how the underlying investments have done and also taking into account deposits and withdrawals.
For example, if your account was $1 million at the beginning of the year and the capital gains and dividends amounted to $100K, but you withdrew $200K, your time-weighted return would be a positive figure while your money-weighted return would be negative.
If you don’t make many deposits or withdrawals, the time-weighted and money-weighted returns will be very similar, if not the exact same.
Because both types of return share important information, we have decided to include both figures going forward.
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