Definition
Time-weighted return divides the measurement period at external cash-flow boundaries, calculates the return of each supported sub-period, and geometrically links those returns.
- A return measure that links sub-period returns around external cash flows so deposits and withdrawals do not drive the investment-performance result.
The question this metric answers
How did the investments perform with external cash-flow effects neutralized?
- It separates investment performance from the investor's decision to add or remove capital, which makes it useful for cash-flow-neutralized comparisons.
- Use TWR only when valuation evidence is sufficient around the relevant cash-flow boundaries. A transaction list without the required portfolio valuations is not enough to support a true TWR claim.
Evidence required before the number deserves trust
Valuations around cash-flow boundaries plus complete external cash-flow classification
- Identify external cash-flow boundaries such as contributions and withdrawals.
- Establish trustworthy portfolio valuations for the required sub-period boundaries.
- Calculate each supported sub-period return and geometrically link the results.
- If valuation or cash-flow evidence is incomplete, withholding TWR is more defensible than approximating it silently.
What investors often miss
The formula is the easy part. The hard part is having trustworthy valuations, external cash-flow classification and temporal alignment for every required sub-period.
- A consolidated TWR needs one coherent portfolio boundary and enough valuation and external-cash-flow evidence across that boundary; missing evidence should make the metric unavailable rather than guessed.