Time-weighted versus Dollar-weighted returns. Are they different?

percentWhy do I bring this up? Because people often are trying to compare their dollar-weighted computation to what they see reported on statements, etc., and wonder why they have different numbers.

Yes, time-weighted returns are different than dollar-weighted returns (sometimes called money returns). It is possible for someone to experience losing money compared to their total contributions and still show a positive time-weighted return (or the opposite should the sequence of contributions be reversed). How can this be right?

The inserted file below describes the differences in simple terms. Rather than repeat those differences in the blog, I invite you to read the short insert.

A more in-depth discussion may also be found here. Note that the industry standard is to use the time-weighted method since everyone makes their contributions, or withdrawals, at different times and in different amounts.

While on this topic of returns – the differences come from the variation of returns over time. Here’s a great tutorial online that discusses how that volatility of returns affects simple return calculations, particularly during retirement withdrawals.

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