The Modified Dietz Method, Explained with a Worked Example

If you have ever had to report a quarterly return for an account that took a $200,000 contribution halfway through, you have met the problem Modified Dietz solves. Below is the formula, a full worked example with the arithmetic shown, a calculator you can run with your own numbers, and an honest account of where the method breaks.

The formula

The weight for each flow is:

Where CD is the number of calendar days in the period and D_i is the number of calendar days from the start of the period to the date of the flow. A contribution on the first day of the period gets a weight of 1.0 because it was invested the whole time. A contribution on the last day gets a weight near 0 because it earned nothing.

The numerator is simple: the gain, once you strip out money that was added or removed rather than earned. The denominator is the interesting part. It is not the starting balance, it is the average capital at work over the period.

Worked example

A separately managed account over Q1 2026. One contribution mid-quarter.

Step 1: count the days

Q1 2026 runs Jan 1 through Mar 31, so CD = 90 days. From Jan 1 to Feb 15 is 45 days, so D = 45.

Step 2: weight the flow

W = (90 − 45) / 90 = 0.50

The contribution was invested for exactly half the quarter, so half of it counts toward the capital that had a chance to earn a return.

Step 3: numerator, the gain

$1,300,000 − $1,000,000 − $200,000 = $100,000

The account grew by $300,000, but $200,000 of that was the client’s own money. The portfolio earned $100,000.

Step 4: denominator, the average capital

$1,000,000 + (0.50 × $200,000) = $1,100,000

Step 5: the return

$100,000 / $1,100,000 = 9.09%

Calculate your own

How this differs from true time-weighted return

Modified Dietz is an estimate of time-weighted return. True time-weighted return requires you to value the portfolio on every external cash flow date, then geometrically link the sub-period returns. Modified Dietz exists because that valuation is not always available.

Take the same account. Suppose the portfolio was actually worth $1,080,000 immediately before the Feb 15 contribution.

True time-weighted return is 9.69%. Modified Dietz gave 9.09%. The method understated performance by 60 basis points on a single, fairly ordinary cash flow.

That gap is the whole tradeoff. Modified Dietz assumes the portfolio earned at a constant rate across the period. Here it did not: it returned 8% in the first half and 1.6% in the second, and the client added money right before the weaker stretch. The approximation cannot see that.

Read the full explanation of time-weighted return, including when you are required to use it rather than an approximation.

Where Modified Dietz breaks

Large cash flows

The error scales with the size of the flow relative to the portfolio. A 2% contribution will barely move the answer. A 40% contribution in a volatile quarter can throw the number off by well over 100 basis points. Firms therefore set a large-flow threshold above which they require an actual valuation rather than an approximation. GIPS deliberately prescribes no number here; in practice firms land anywhere from 5% to 25% of portfolio value, and the worked example in the GIPS Handbook itself uses 5%. The right threshold depends on how liquid and volatile the strategy is.

Volatile periods

The method’s core assumption is a smooth, constant rate of return. In a quarter with a sharp drawdown and recovery, that assumption fails, and it fails worst precisely when a client moved money in response to the volatility.

Negative or near-zero denominators

If a portfolio starts near zero and is funded mid-period, or if withdrawals are large enough that weighted average capital approaches zero, the denominator collapses and the return becomes meaningless or undefined. Any implementation needs to trap this case rather than print a number. The calculator above does.

Day-count conventions

Whether you count the flow date itself as invested, and whether you use calendar days or trading days, will move the answer slightly. The convention matters less than applying it consistently across every account and every period. Pick one, document it, never change it mid-stream.

Modified Dietz versus Simple Dietz

Simple Dietz, which CFA Institute materials call the Original Dietz method, assumes every cash flow happened at the exact midpoint of the period, so it uses a flat 0.5 weight for everything. In our example the flow genuinely landed at the midpoint, so the two methods agree exactly. Move that contribution to Jan 10 and Simple Dietz still says 0.5 while Modified Dietz correctly says 0.90, and the answers diverge.

Simple Dietz is a relic of hand calculation. There is no reason to use it now that the flow dates are sitting in your accounting system.

What the GIPS standards require

Modified Dietz is fully acceptable under the current GIPS standards. This is worth stating plainly, because it is widely misunderstood. The method is not a legacy tolerance for old periods. It is the normal way compliant returns get calculated between valuation points.

Under the 2020 GIPS standards, portfolios included in a composite must be valued:

That last row is where Modified Dietz lives. A compliant firm values the portfolio at each large cash flow, computes the partial-period returns before and after that flow using Modified Dietz or another daily-weighted method, and geometrically links them. Nothing in the standards requires daily valuation of every portfolio.

Two things the standards do not say, both of which get repeated as though they did. There is no requirement to value on the date of every external cash flow for composite portfolios, only large ones. And GIPS prescribes no numeric threshold for what counts as large: the firm must define it in advance, per composite, based on the asset class’s liquidity, volatility, and how the strategy trades.

Private market investment portfolios run on a different cycle. They must be valued at least quarterly and are not required to be valued at large cash flows.

The practical takeaway

Use Modified Dietz when you do not have flow-date valuations and the flows are small relative to the portfolio. Set a large-flow threshold above which you require a real valuation. Document your day-count convention. And know the number you are producing is an estimate, so do not present it to a client as though it were exact.

If you are evaluating a portfolio system, three questions separate them: does it compute Modified Dietz from the transaction dates already in the ledger, will it tell you when a flow exceeded your threshold, and what does it do on the dates where a real valuation exists. Systems differ on all three, and the differences are rarely in the marketing copy.

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.