There are different ways to measure returns for assets. Understand which method is being used when reviewing your investment performance.
Your Rate of Return
Gain or loss on an investment
Over a specified time period
Expressed as a percentage
Reviewing Your Returns
There are a number of ways to calculate an investment rate of return.
Time-Weighted and Money-Weighted are two calculation methods that investors see when looking at their asset performance.
Time-Weighted Return (TWR)
Measures the compound rate of growth in an investment as seen in the newspaper and online.
Eliminates the effects created by deposits and withdrawals of cash.
Used to evaluate the returns of the investment manager.
Money-Weighted Return (MWR)
Measures the investor’s specific returns as seen on their statement. It’s a Personal Rate of Return.
Incorporates the size of the investor's deposits and withdrawals.
Incorporates the timing of deposits and withdrawals of cash.
The Annual Performance Report that you will receive for the period ending December 31, 2021 will reflect returns calculated using the money-weighted calculation method.
The Impact of Investor Behaviour
Investor behaviour can have a significant impact on Money-Weighted Returns
Dan
Buys 100 units Jan 1
Kate
Buys 70 units Jan 1
Buys 30 units Apr 30
Leon
Buys 50 units Jan 1
Buys 50 units Sep 30
Investors
Dan, Kate and Leon started investing in the same fund on January 1st. Each buys 100 units on different schedules.
They finish the year with the same number of units but with different returns.
The Fund
Ending price @$11
10% TWR
Leon
BUYS HIGH
Buys 50 more units @ $13
Kate
BUYS LOW
Buys 30 more units @ $9
The Fund
Starting price @$10
Dan
Buy & hold 100 units
10%
TWR
10%
MWR
Dan’s buy and hold strategy yielded him the same results as the fund so the MWR and the TWR are the same.
Kate
Added units at lower $
10%
TWR
15%
MWR
Kate bought additional units of the fund while it was underperforming, resulting in her MWR being higher.
Leon
Added units at higher $
10%
TWR
TWR
-7.5%
Leon bought additional units of the fund at a higher price, which caused his MWR to be lower.
The timing and size of investments makes a difference.
Each investor finished with the same amount of units of the fund. Although their Time-Weighted Returns are the same, their Money-Weighted Returns (or Personal Rate of Returns) are very different.
We can help you understand how your personal rate of returns can influence the outcomes of your long-term investment goals.
