Learn / Time-weighted vs personal return
The FolioBright hero row shows two returns over the same window, and they are not two ways of saying one thing. Time-weighted return grades the investments. Personal rate of return grades what your own money did. They disagree whenever you added or withdrew money along the way — and the size of the disagreement is the one figure no single return can give you.
Two investors, one fund, one year
A fund rises 10% in the first half of the year and falls 5% in the second. Chained, that is a time-weighted return of (1 + 0.10) × (1 − 0.05) − 1 = 4.50% for the year — the fund’s return, and the figure that belongs on a fact sheet. Two investors hold it.
Investor A — one deposit
| Start of year | $10,000 in |
| Mid-year, after +10% | $11,000 |
| Year end, after −5% | $10,450 |
| Gain on $10,000 in | $450 |
No flows in the middle, so the two agree.
Investor B — adds at mid-year
| Start of year | $10,000 in |
| Mid-year, after +10%, adds $20,000 | $31,000 |
| Year end, after −5% | $29,450 |
| Gain on $30,000 in | −$550 |
Same fund, same year, and the money lost. Two thirds of it arrived just before the fall.
Investor B’s fund did exactly as well as Investor A’s — 4.50%, time-weighted — and Investor B is down $550. Neither figure is wrong. Time-weighted return strips the deposits out and reports the fund; personal rate of return leaves them in and reports the outcome, which depends on when the money went in as much as on what it bought. A tracker that shows only one of these is hiding the other half of the story.
How each one is worked out
Time-weighted return cuts the window at every month-end, works out each month’s return on the money that was in the book that month, and chains the months together. A deposit changes the base for the following month and nothing else, so a large contribution the day before a fall does not pull the figure down. Over your selected window it is reported cumulatively, with the annualized rate beside it, and against the benchmark you have chosen — which is the comparison it exists for.
Personal rate of return takes every dated flow — the opening value, each deposit and withdrawal, the closing value — and solves for the single annual rate that reconciles them. FolioBright solves it by bisection rather than Newton’s method: slower by a microsecond, and it cannot diverge, which matters on a book whose flows change sign, where a faster method occasionally returns nonsense. Flows are dated to the month, the finest grain the book keeps, and the card says so. A one-day window has no flows to weight, so the personal figure is not shown for it rather than shown wrong.
Reading the gap
When personal is below time-weighted, your additions landed ahead of weaker months, or your withdrawals ahead of stronger ones. When it is above, the reverse — the money arrived before the gains. Either way the holdings’ own performance is the time-weighted line, and the difference is what your timing added or cost. Over a long window with steady contributions the two tend to converge; over a short one with a big flow in the middle they can be far apart, which is when it is most worth knowing. Press either card and FolioBright shows the window, the flows and the arithmetic behind the figure.
Questions
What is time-weighted return?
Time-weighted return measures how the investments performed, with the effect of your deposits and withdrawals removed. The period is cut at every cash flow, each slice's return is worked out on its own, and the slices are chained together. It is the figure to compare with an index, because an index has no deposits.
What is personal rate of return?
Personal rate of return — also called money-weighted return, or internal rate of return — is the one rate that, applied to every dollar for exactly as long as it was invested, turns what you put in into what you have. It keeps your deposits and withdrawals in, so it moves with when money went in as well as with what it bought.
Why are my time-weighted and personal returns different?
Because you added or withdrew money during the period. If you paid in heavily just before a fall, your personal return is below the time-weighted one: more of your money was exposed to the fall than to the rise before it. If you added just before a rise, it is above. The gap is the effect of your timing, and it is the reason both figures are shown.
Which return should I use?
Time-weighted to judge the holdings or compare with a benchmark; personal rate of return to judge the outcome for your own money. FolioBright shows the two side by side over the same window, and a third, return on equity, when margin has been used.