Time-Weighted Return: Formula, Worked Example, and Calculator

The reason time-weighted return exists is fairness in both directions. A client who wires in $500,000 the day before a rally should not make his adviser look brilliant. A client who withdraws before one should not make her look incompetent. Below is the formula, a worked example with every number shown, a calculator, and the case for when you should be showing a different return entirely.

The formula

Time-weighted return is the geometric linking of sub-period returns:

Where each sub-period return is:

The mechanic is a chain. Each sub-period starts with whatever the portfolio was worth plus whatever money just moved in or out, and ends at the next valuation point. Multiply the growth factors together and the cash flows cancel out of the result entirely.

Worked example

The same account used in our Modified Dietz guide, so you can compare methods directly. Q1 2026, one mid-quarter contribution, and a valuation on the flow date.

Step 1: split at the cash flow

One external flow means two sub-periods: Jan 1 to Feb 15, and Feb 15 to Mar 31.

Step 2: first sub-period

The portfolio started at $1,000,000 and was worth $1,080,000 immediately before the contribution landed.

r₁ = $1,080,000 / $1,000,000 − 1 = 0.0800 = 8.00%

Step 3: second sub-period

The contribution lands, so the second sub-period begins with $1,080,000 + $200,000 = $1,280,000. It ends at $1,300,000.

r₂ = $1,300,000 / $1,280,000 − 1 = 0.015625 = 1.5625%

Step 4: link them

TWR = 1.0800 × 1.015625 − 1 = 1.096875 − 1 = 9.6875%

Note what did not happen: the $200,000 contribution appears nowhere in the answer. It changed the size of the portfolio without changing the reported return. That is the entire point.

Calculate your own

Time-weighted versus money-weighted

Money-weighted return, usually computed as an internal rate of return, answers a different question. It asks what the client actually earned on the money they had invested, which means the timing and size of their cash flows change the answer directly.

Run all three methods on the same account and you get three different numbers:

The money-weighted return is lower than the time-weighted return because the client added $200,000 immediately before the portfolio’s weaker stretch. More of their capital was exposed to the 1.6% sub-period than to the 8% one. The manager did not perform worse. The client’s timing was worse.

Neither number is wrong. They answer different questions, and showing the wrong one causes real arguments in client meetings. Our TWR vs IRR guide covers which to present and when.

When you are expected to use time-weighted return

Composite and firm-level performance

Under the 2020 GIPS standards a firm must present time-weighted returns unless it controls the external cash flows and the composite or pooled fund is closed-end, fixed life, fixed commitment, or holds illiquid investments as a significant part of the strategy. Where those conditions are met, money-weighted returns may be presented instead.

For time-weighted composites, portfolios must be valued at least monthly, at each month end, and on the date of every large cash flow as the firm itself defines large. Between those valuation points, Modified Dietz and other daily-weighted methods are accepted. Approximation is not a compliance failure; skipping the large-flow valuation is.

Anything compared to a benchmark

An index has no cash flows. Comparing a money-weighted portfolio return against a plain index return is not a like-for-like comparison, and it will flatter or damage you at random depending on client behavior.

The fix, where money-weighted return is the required measure, is not to switch to time-weighted. It is a public market equivalent: an index return restated using the fund’s own cash flow timing. GIPS requires a since-inception money-weighted benchmark return alongside a money-weighted composite return, and contemplates a public market equivalent as that benchmark.

Discretionary manager evaluation

If the manager does not control the timing of contributions, they should not be measured on it. That is the ethical case, and it is the reason the convention exists at all.

Where money-weighted usually wins instead

Private equity, real estate, and drawdown funds, where the manager does control the timing of capital calls and distributions. There, timing is skill, and the IRR is the right measure. This is exactly the condition GIPS uses: control over the external cash flows is what unlocks the option to present money-weighted returns.

Common errors

Valuing after the flow instead of before

The single most common implementation bug. If you record the portfolio value after the contribution posts, the contribution shows up as investment gain and inflates the sub-period return. The valuation must capture the portfolio as it stood immediately before money moved.

Missing a cash flow entirely

An unrecorded transfer between two accounts inside the same household looks like a loss in one and a gain in the other. Reconcile flows before trusting any return figure.

Treating income as an external flow

Dividends, interest, and realized gains generated inside the portfolio are not external cash flows. Only money crossing the portfolio boundary counts. Misclassifying a dividend as a contribution will strip out real performance.

The reverse trips people up more often: fees and expenses paid out of the portfolio do count as external cash flows, even though income received does not. Advisory fee debits are the usual culprit.

Fee treatment left undocumented

Gross-of-fee and net-of-fee returns answer different questions and are not comparable to each other. If you are a US registered investment adviser, note that the SEC Marketing Rule does not let you simply pick one: any advertisement presenting gross performance must also present net performance with at least equal prominence, in a format designed to facilitate comparison, over the same period and using the same methodology. Label which is which and apply the choice consistently.

Annualizing short periods

Do not annualize a return for a period shorter than one year. Multiplying a strong quarter up to an annual figure implies a forecast you cannot support. For periods over a year, annualize geometrically:

When you cannot value on the flow date

Time-weighted return requires a valuation at every external cash flow. Illiquid holdings, delayed custodial data, and private funds that only report quarterly all make that impossible some of the time.

The usual answer is to approximate with the Modified Dietz method, which weights each flow by the fraction of the period it was invested rather than requiring a valuation. In the example above, Modified Dietz returns 9.09% against a true 9.69%, understating performance by 60 basis points on one ordinary contribution.

Set a threshold. Below it, approximate. Above it, get a real valuation. The Modified Dietz guide walks through the tradeoff in detail.

Educational content. Advantage Portfolio Hub is a software provider, not an investment adviser, accountant, or law firm. Nothing here is investment, tax, accounting, or compliance advice.