📈 What is TWR (Time-Weighted Rate of Return)?
TWR (Time-Weighted Rate of Return) is a way to measure your portfolio’s performance without being affected by deposits or withdrawals.
In other words, TWR shows how well your investments performed on their own, regardless of when or how much money you added or took out.
🔍 Why is TWR useful?
When you're actively adding or withdrawing funds, simple return calculations can be misleading.
TWR solves this by dividing the timeline into segments between each cash flow and calculating performance separately for each one. Then it combines them into a single return.
🧮 How is TWR calculated?
The full period is split into intervals between each deposit or withdrawal.
For each interval, the return is calculated like this:
(Ending value – Starting value) / Starting value
Then the returns are multiplied together using:
TWR = (1 + r₁) × (1 + r₂) × ... × (1 + rₙ) – 1
Where r₁, r₂, etc., are returns for each sub-period.
📘 Example
Let's assume:
You start with $10,000.
After one month, your portfolio grows to $10,500. You add $5,000 (new total: $15,500).
A month later, it grows to $16,000.
TWR calculation:
First period return:
(10,500 – 10,000) / 10,000 = +5%
Second period return:
(16,000 – 15,500) / 15,500 = +3.2%
TWR = (1 + 0.05) × (1 + 0.032) – 1 = +8.36%
Even though you added money, TWR shows the return purely from investment performance.