Time-Weighted vs. Dollar-Weighted Return: What's the Difference?
Two people can look at the exact same account and calculate two different “return” numbers, both technically correct, because they’re answering different questions.
The short answer
Time-weighted return measures how an investment performed based purely on its own price changes, removing the effect of when money was added or withdrawn. Dollar-weighted return, sometimes called the internal rate of return, measures the actual return experienced by an investor, factoring in the size and timing of their specific deposits and withdrawals. The two can diverge significantly when contributions happen unevenly, especially around periods of strong or weak performance.
Why time-weighted return exists
Time-weighted return is designed to isolate the performance of an investment itself, independent of investor behavior. It breaks a period into segments around each cash flow, calculates the return for each segment, and links them together, which neutralizes the effect of adding or removing money at any particular point. This makes it a fair way to compare investments or evaluate how something like an index fund performed on its own merits, since two people who invested different amounts at different times would still see the same time-weighted return for holding the same thing over the same period.
Why dollar-weighted return exists
Dollar-weighted return instead asks: given exactly when and how much money went in and out, what return did this specific investor actually experience? It gives more weight to periods when a larger dollar amount was invested, which means the timing of contributions directly affects the result. Someone who happened to invest a larger sum right before a strong stretch, or right before a weak one, will see that reflected more heavily in their dollar-weighted return than in the time-weighted figure for the same underlying investment.
How the two can pull apart, in general terms
Picture two investors in the same fund over the same multi-year period. One invests a lump sum at the very start and never adds more. The other adds smaller, recurring amounts over time, including a larger contribution right before a period of weaker performance. Their time-weighted return — the fund’s own performance — would be identical, since it’s the same fund over the same stretch. Their dollar-weighted returns could differ noticeably, because the second investor had proportionally more money exposed during the weaker stretch. Neither number is wrong; they’re answering different questions about the same underlying facts.
What to weigh when looking at either figure
Time-weighted return is generally the more useful figure for evaluating an investment or comparing it to another, since it isolates performance from the effects of contribution timing — this is part of why it’s the standard used in most published fund performance figures. Dollar-weighted return is more useful for understanding a personal, lived outcome, including the effect of decisions like rebalancing or adjusting contributions during volatile periods. Confusing the two can lead to frustration — comparing a personal dollar-weighted result against a fund’s published time-weighted return isn’t quite an apples-to-apples comparison, since contribution timing isn’t part of the published figure at all.
The takeaway
Time-weighted return describes how an investment performed; dollar-weighted return describes how an investor’s money performed given their own timing — knowing which one is being quoted, and why they might not match, avoids a common source of confusion when reviewing account performance.