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The fund's return. The asset's return. Not your return.
Time-weighted return (TWR) measures the return of an asset by chain-linking returns between every cash flow, removing the distorting effect of when contributions and withdrawals happened. It is the standard for evaluating fund manager skill — TWR is what the asset earned, regardless of investor timing. For the investor experience, use XIRR.
TWR = Π(1 + Rᵢ) − 1 where Rᵢ is each sub-period return between cash flowsTWR = ∏i (1 + Ri) − 1You break the portfolio history into segments at every contribution and withdrawal. Compute the return for each segment based purely on value change (not flows). Multiply all sub-period (1 + return) factors together. Subtract one.
TWR exists because funds are evaluated on the asset's performance, independent of investor cash flow timing. Imagine two investors in the same fund — one bought at $100, one bought at $150 after a big run. The fund's TWR is identical for both. But the second investor's XIRR is much worse because they bought at the top.
Mutual funds, ETFs, and SMAs all report TWR because it is the only fair way to grade the manager — investors' bad timing is not the manager's fault. But if you want to know what you actually earned, that is XIRR.
Your portfolio starts at $10,000, rises to $11,000. You then deposit $5,000 (now $16,000). It then drops to $14,400.
Sub-period 1: 11,000 / 10,000 − 1 = +10%
Sub-period 2: 14,400 / 16,000 − 1 = −10%
TWR = (1.10)(0.90) − 1 = −1%
The asset's return was −1%. (Compare: your XIRR would be worse because half your money was added right before the loss.)
"Good" TWR is just the long-run return of your asset class — for the S&P 500, that means roughly 10% nominal / 7% real annualized over multi-year periods. The interesting comparison is your TWR vs. your XIRR — the gap is your timing penalty.
TWR removes the timing of your deposits and withdrawals; XIRR weights by how long each dollar was invested. If your timing was bad, XIRR is lower than TWR; if your timing was good, XIRR is higher.
For evaluating a fund manager, TWR. For evaluating your own outcome, XIRR. Both are correct for different questions.
Reinvested dividends are part of the sub-period return. Cash dividends paid out are a withdrawal and reset the sub-period.
Yes — Foliolytic reports both TWR and XIRR. The gap between them is your "behavior gap" — a clean measure of timing skill.
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