Time-weighted return
Certified Financial Planner glossary · Certified Financial Planner
Definition
A return calculation neutral to cash flow timing; the correct measure of manager performance.
Time-weighted return in plain English
A client dumps a huge contribution right before a rally, and money-weighted results make the manager look like a genius for cash-flow luck. Time-weighted return neutralizes cash-flow timing and is the correct measure of manager performance. It chains sub-period returns between external flows. When the question is about the manager's skill rather than the client's contribution timing, prefer time-weighted over IRR-style money-weighted figures. Save money-weighted math for the investor's personal experience.
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