Comments on: Personal Rates of Return: Money Weighted vs. Time Weighted

By: Robin Smith

Robin Smith — Sat, 03 Jul 2010 15:31:13 +0000

My rate of return (Fidelity 401 acct, fidelity managed for about $200 a quarter year.) LAST year at end was 39%.

So far this year it is 13.7 I lost $1500 of whatever gains I made last year, plu the costs associaled with the management fees.

When I was managing the fund, not fidelity, the years before last, I was making +3.00 – +6% , so it’s not 39%, but it wasn’t negative either.

Any advice? Sit it out, wait til year end to judge the Fid managing?
thanks… the fund holds $45K in 401, and $5K in 457 account.

By: TFB

TFB — Mon, 28 Sep 2009 04:53:18 +0000

If you used XIRR without any adjustment and you got 41%, that number is an annualized number. To make it comparable with a YTD time-weighted return, you would adjust for the numbers of days to date. The return would be (1 + 0.41) ^ (263 / 365) – 1 = 28%.

By: Paul

Paul — Sun, 27 Sep 2009 00:47:22 +0000

I’m still confused. I could be wrong, but I think the terms rate of return and return are different. You noted in the monthly update that your return year to date (YTD) was 41%. Then above you say that your “rate of return” YTD was 41%. I don’t think of them as the same thing. The return of the market since it’s bottom has been about 50%, but it has done that in about 1/2 year; I would consider that a the rate of return be closer to 100% (50% divided by 1/2 year). I’d just like to get a clear understanding what your 41% represents.

By: Bucky

Bucky — Fri, 25 Sep 2009 23:44:16 +0000

Good article. I always thought that Personal Rate of Return always meant IRR.

By: Victor

Victor — Fri, 25 Sep 2009 20:54:18 +0000

Thank you for the thorough follow-up post!

By: Jonathan

Jonathan — Fri, 25 Sep 2009 20:18:13 +0000

I think what you are saying is correct, but I think the following statement is also correct and is more of what I meant in regards to comparing the returns:

If a mutual fund has a calculated (time-weighted) return of 20% for one year, an investor who had money in the fund for that entire year, would have realized that same 20% return. When there are no deposits or withdrawals, the time-weighted and money-weighted returns are the same.

By: rupak

rupak — Fri, 25 Sep 2009 16:51:55 +0000

I think you are oversimplifying time weighted return by saying it assumes no transactions at all. Actually time weighted return factors in the amount of time the specific amount of money was left to grow. For example, in your above example, you first calculate the holding period return of the first 10k for the first 3.5 months, then you calculate the holding period return for your next period (with whatever left of 10K+5k). Then you take the geometric mean of the returns. So as you can see, time weighted return does take into account the new money coming in (and out).
Actually, if you are a money manager (mutual fund manager), time weighted return is the best one to use because you do not have control of inflows and outflows of cash. But individuals can control when to invest and when to take out money, so it’s ok to use money weighted return. I think time weighted return is a measure of manager’s performance.