Time Weighted Rate of Return or TWR – Concept, Usage, Significance, Formula & more

Know everything about Time Weighted Rate of Return or TWR.

There’re lots of methods to get an idea about the portfolio’s performance. One can take various factors into account to derive the data.

And Time-Weighted Rate of return or TWR is one of them. It’s a chief method that every trader should know before moving ahead in the trading sector.

Trading isn’t a piece of cake. Expert traders tab on every movement of the market to identify the profitable and risky curves in the market.

It’s critical to stay updated at all times on how is your invested money performing.

However, it’s impossible to get a full-fledged insight into the market without using statistical and numerical methods.

The crux of the matter is time, which’s a critical factor to be analyzed by one.

What is Time Weighted Return or TWR?

Time-Weighted Return, also known as TWR or TWRR, provides traders with a real idea about their portfolio’s performance.

This method helps traders in calculating the compound growth rate in a portfolio. Alongside, it helps them in identifying the inflows and outflows of money that took place over time.

The method enables traders to obtain an overview of their investment selections using this method.

In a nutshell, TWR split returns into varying sub-periods or intervals within a portfolio and come up with clear information about the portfolio’s performance.

Though the redemption and investments made over time are also taken into account. In most instances, money inflows and outflows trigger confusion related to a portfolio’s growth rate.

Hence, by using the TWR method, the investment managers try to eliminate such effects.

However, this method is also quite popular as it helps the trader in getting well-familiar with his portfolio so he could bring more strategies into action.

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Finding Portfolio Performance using TWR

It happens when investors find it tough to identify the return value obtained from the particular investment in many events.

It raises more misconceptions if the investor has added further money into his portfolio.

That’s why it becomes vital first to eliminate the cash you’ve submitted in the portfolio. We can’t evaluate it alongside if you want to obtain full-fledged information.

Your investment position daily goes up and down; hence adding further cash in it creates complexity to come up with the correct data.

Thanks to the Time-Weighted Rate of Return method that eliminates all such concerns. Though, there’re a few points that one must consider before using this method.

For instance, you need to consider when the withdrawals and the investment are made over time, etc.

If you also hold previous data on your portfolio, it must be viewed while using the TWR method to make things easier.

Thereby, a trader can proceed with further calculation. As said before, the return obtained between each period of withdrawals or contribution is evaluated, and the period is also multiplied.

Ultimately, a trader obtains a compounding effect of the portfolio’s investment return on a big picture.

Where is Time-Weighted Return Primarily Useful?

TWR or TWRR is quite useful for fund managers or public investment managers. Daily, these managers have to deal with public securities.  Hence, they encounter lots of issues.

Managers have no control over time. In many cases, the cash flows make it quite tricky to come up with an ideal decision.

Altogether, the TWR method provides them with a way to measure the rate of returns better.

What is the Formula for TWR Calculation?

The most basic formula for calculating TWR for a specific period is-

TWR = (Ending value – Beginning value) / Beginning value

Example –

Suppose Mr X invested in Mutual Fund Rs.60,000 on January 1, 2018. At the end of the year, on December 31^, 2018, the invested amount increase by Rs.1000 Rs, and now the total amount is Rs.61,000.

So, by using the TWR formula

TWR = (Ending value – Beginning value) / Beginning value

We get the following data-

TWR = (61,000 – 60,000) / 60,000.

Hence, TWR = 0.02%.

However, the formula helps traders in the précised calculation of each sub-period, especially in the events when redemptions or investments have taken place.

But, when multiple sub-periods are involved in TWR, the method given below is used-

TWR = [(1 + rate of return from the 1st period) x (1 + rate of return from the 2nd period) x .. x (1 + Rate of return from the nth period)] – 1.

Difference Between TWR and RoR

Now, you’ve come to know how to use TWR. But another critical thing is the difference between RoR and TWR. So, let’s clear all doubts.

RoR, also known as Rate of Return, can be a net gain or loss to an investor on a particular investment. RoR is also represented in a percentage form like TWR.

Though, the RoR only provides you with a total of gain you’ve incurred through a particular investment without letting you know about the cash flow differences.

On the other hand, TWR does. TWR determines the rate of return by first clarifying the deposit and withdrawal made over time. That’s why it’s different from ROR.

Limitations of the TWR

In a portfolio, it’s a usual thing that cash flow doesn’t stay constant for all time. It goes up and down, as lots of withdrawals and deposit occurs over time.

That’s why there are high chances that one can find an error in the ultimate data. For the right calculation, you must use an online calculator or software to align the data correctly.

Time Weighted Rate of Return – Conclusion

Time-Weighted Rate of Return is helpful in deriving the data that shed light on the performance of a portfolio.

How well your invested amount is performing in the market? You get an idea about it using the TMR method.

However, there’re a few shortcomings of using this method as well. So make sure you proceed using it by first reviewing it thoroughly.

The TMR is best to provide you with clear-cut information about the returns from investment by eliminating all the withdrawal and deposit funds from the equations.

Hence, the method is more reliable than depending solely on numbers obtained from the Rate of Return.

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