Money-weighted vs time-weighted return: why your brokerage's number lies

Your broker shows you one big percentage at the top of the screen, and it looks awfully sure of itself. The trouble is that “what was my return?” is really two questions wearing one coat, and the two answers can be miles apart. That gap is what money-weighted vs time-weighted return is all about. Most dashboards quietly mash the pair together, or bury the bit where you actually put your money in, which is a neat way for a portfolio return to mislead the one person it is supposed to help. That person is you. Give me twenty minutes and you will read your own number for what it is, and never take a brokerage headline at face value again.

Why the headline number misleads

Two investors buy the exact same fund and the fund does the exact same thing all year. The first one drips money in steadily, month after month. The second dumps a big lump sum in right before a rough patch and then sits on his hands. The fund had one performance. The investors did NOT have the same year, because the second one had far more cash riding through the bad stretch. Same strategy, very different result in the account.

So should the headline percentage be the same for both? Depends entirely on which question you are asking, and your dashboard rarely admits which one it picked. A single number with no label is an answer with the question quietly filed off.

What time-weighted return actually measures

Time-weighted return is the strategy’s report card. It throws out the timing and size of your deposits and withdrawals on purpose, so all that survives is how the underlying investments did, period by period, as if every pound had been parked there from the start. This is the number a fund quotes, and fairly so. A fund manager cannot control when you decide to top up, so it would be daft to credit or blame him for your deposit schedule.

That makes time-weighted the answer to a clean question: how good was the thing I bought? It is also the right tool for measuring a fund against a benchmark, since the benchmark knows nothing about your deposits either. Reach for it when you want to know whether you are beating the index, not how your own wallet fared.

And now the catch. A glorious time-weighted return can sit right next to a much thinner result in your actual account, and both numbers are telling the truth. The strategy did brilliantly. You, given the way you fed money in, did rather less brilliantly. Time-weighted will never breathe a word about that gap, because hiding your timing is the whole job it was hired to do.

What money-weighted return actually measures

Money-weighted return is the other report card, and this one has your name on it. Rather than stripping your deposits and withdrawals out, it folds them in, so pounds you had invested during the good stretches count for more and pounds you parked during the bad stretches count for less. It is the internal rate of return on your real cash flows. It answers the question you actually lie awake over: given when I chose to put money in and pull it out, what did I personally make?

So this is the honest one. Pile in at the top, full of confidence, then go quiet at the bottom, and money-weighted return has you bang to rights. Say a strategy ends the year up a tidy ten per cent on a time-weighted basis. If you threw most of your money in just before the worst part, your money-weighted figure could land well below that, because the bulk of your cash was sitting out in the rain exactly when it was pouring. Good year for the fund. Bad year for your timing. Only one of those two facts shows up on the headline, and it is not the one about you.

Which number do you actually want

Both, for different jobs. So let me take a side on each.

Use time-weighted when you are judging the investment and not yourself. Is this fund any good? Is my stock-picking beating a cheap index after all that effort? Those are strategy questions, and you want the timing of your deposits shoved out of the frame so the comparison is fair. It is the right number for the are-you-beating-the-index question, where your flows would only muddy the water.

Use money-weighted when you are judging the whole operation, you very much included. What did my actual pot make, given every call I made about when to add and when to back off? That tells you whether your own behaviour helped or hurt, which is why it is the figure worth staring at hardest in a quarterly review. It is where the discipline lives or dies.

The trap is asking one to do the other’s job. A lovely time-weighted figure can con you into thinking you nailed it while your money-weighted result quietly shows your timing bled you dry. Run it the other way and a grim money-weighted year can have you firing a perfectly good fund when the real culprit was your own deposit habit. Two questions, two numbers, and no single glowing percentage gets to be both.

How to read your own return honestly

Now the awkward part. To tell these two numbers apart at all, you need a record of when the money actually moved: the size and date of every contribution, every withdrawal, every trade. Time-weighted wants the period boundaries where the flows landed so it can wall them off. Money-weighted wants the cash flows themselves so it can weight them. Lose the flow history and you cannot compute either one properly, and that gap is precisely where a single unlabelled percentage gets to hide.

Which is why a tracker that only knows your current balances can hand you a figure but never an honest one. The fix is not a prettier dashboard. It is a reconciled book. Record your contributions and trades as a ledger you typed and can audit, and both returns fall straight out of the same source of truth, with the deposit timing sitting in plain sight instead of swept under the carpet. Same facts, asked two ways, and you get to see which answer is which. That is the whole point of Strata being manual by design. You cannot reconcile your own return against your own decisions if you never bothered to write the decisions down.

So the next time a dashboard flashes one confident percentage at you, ask it the rude question: which one are you, and where did you hide my timing? A shrug is not good enough, and neither are you, frankly, for putting up with it. Pick a tracker that earns its keep on exactly this sort of thing, which is what a buyer’s guide is for. Once your book is reconciled and your flows are on the record, both numbers stop flattering you and start telling you the truth. If a return you can genuinely stand behind sounds like the standard your money deserves, you can build your portfolio and read it straight.