Using Time-Weighted Rate of Return (TWR) instead of Money-Weighted Rate of Return (MWR) is like looking at your investments through a clearer and fairer lens. TWR holds significant importance for several reasons, and we believe it is essential for our investors to understand the rationale behind this choice.
WHY TWR IS IMPORTANT
Eliminates Timing Bias: TWR eliminates the impact of when you deposit or withdraw funds from your investments. With MWR, the timing of your contributions and withdrawals can distort the apparent performance of your portfolio, potentially making it look better or worse than it actually is.
- Facilitates Fair Comparisons: TWR allows you to compare your investment performance with others or benchmark indices on a level playing field. It’s akin to comparing runners in a race by their time (TWR) rather than the order they finished (MWR), which can be influenced by when they started.
- Encourages Informed Decisions: TWR empowers you to make more informed investment decisions because it portrays your investment’s performance irrespective of your personal transactions. This insight helps you evaluate your investments as a whole, regardless of when you contributed additional funds.
To illustrate the difference between TWR and MWR, let’s consider a very simple example:
Suppose you started with an initial investment of $50,000 in your portfolio. Over a specific period, your portfolio performed exceptionally well, generating a profit of $20,000. This increased your account balance to $70,000.
During the same period, you decided to deposit an additional $300,000 into your portfolio. This infusion of funds significantly increased your account size to $370,000.
– TWR: Your Time-Weighted Rate of Return (TWR) accurately reflects the strategy’s performance and your initial $50,000 investment. If the strategy performed at a rate of 10%, your TWR would be around 10%, indicating the return on your original investment prior to the injection of $300,000.
– MWR: Your Money-Weighted Rate of Return (MWR) factors in the timing of your additional $300,000 deposit. Given that this deposit was made after your portfolio had already generated a significant profit, the MWR might show a much lower return rate on the entire portfolio that is now at $370,000, reflecting the impact of the timing of your contribution. It could be around 2-5% or lower, depending on how much time passed before the deposit.
In this scenario, TWR accurately represents the portfolio manager’s performance and how well your money is being managed regardless of deposits or withdrawals, while MWR considers the timing of your substantial deposit and may reflect a lower return due to the timing of that contribution. This illustrates why TWR is valuable for assessing investment performance without being distorted by personal contributions and timing.
WATCH THE VIDEO ON TWR AND MWR:
We understand that grasping the nuances of Time-Weighted Return (TWR) and Money-Weighted Return (MWR) can be a complex task. To make your understanding easier and more interactive, we recommend watching the informative video available at the following link:
How To Understand Investment Returns (MWR vs TWR??)
https://www.youtube.com/watch?v=TXoWg7ADz6Y&ab_channel=Wealthfront
In just a short video, you’ll find clarity on:
– The purpose and significance of TWR and MWR.
– How TWR eliminates timing effects and assesses investment managers.
– How MWR considers the impact of your contributions, withdrawals, and behavior as an investor
We encourage you to take a few minutes to watch the video and expand your knowledge on TWR and MWR. As always, our team is here to address any questions or provide further assistance if needed. Your financial well-being is our priority, and we believe that informed investors make the best decisions.
PortfolioAnalyst
For those who use Interactive Brokers’ PortfolioAnalyst to monitor their investments, we have outlined the steps to view TWR metrics within the platform:
- Log in to Your Interactive Brokers Account:
– Access your Interactive Brokers account by visiting their website and logging in with your credentials. - Access PortfolioAnalyst:
– Once logged in, select Performance & Reports and navigate to the PortfolioAnalyst section of your account. In PortfolioAnalyst, select the Holdings tab. This can usually be found in the account management or analytics section. - Select the Appropriate Account:
– If you have multiple accounts with Interactive Brokers, choose the account for which you want to view the TWR metrics. PortfolioAnalyst allows you to analyze and view performance metrics for individual accounts or group them together. - Customize Your Reporting Period:
– PortfolioAnalyst allows you to select a specific reporting period, ranging from predefined timeframes to custom date ranges. - View the TWR Metrics:
– Once you’ve selected the account and reporting period, you can access the TWR metrics, which include data related to the performance of your investments. TWR is a common performance measure that adjusts for external cash flows and is useful for assessing the investment portfolio’s performance. - Generate Reports:
– PortfolioAnalyst often allows you to generate detailed reports with these TWR metrics, which can be downloaded for your records or further analysis. - Analyze and Make Informed Decisions:
– With the TWR metrics at your disposal, you can analyze your investment performance, make informed decisions, and adjust your portfolio as necessary to align with your financial goals.
For more on PortfolioAnalyst, please visit: https://ibkrcampus.com/