Time-Weighted Return.
A definition, in plain English — with the books that teach it.
What it means
The time-weighted return (TWR) measures the compound growth rate of a portfolio by breaking the total period into sub-periods at each cash-flow event — contributions, withdrawals, or distributions — calculating the return for each sub-period independently, and then linking those sub-period returns together geometrically. Because each sub-period's return is computed on whatever capital happened to be in the portfolio at the time, the result is unaffected by when the investor added or withdrew money. This makes the TWR the standard metric for evaluating investment managers, since it isolates portfolio performance from decisions the client makes about timing of contributions. The CFA Institute's Global Investment Performance Standards (GIPS) require time-weighted returns precisely because they allow apples-to-apples comparison across managers whose clients have different cash-flow patterns. A fund that returned 12% on a TWR basis outperformed one returning 9%, regardless of what individual investors in each fund earned on a dollar-weighted basis. The tradeoff is that the TWR can diverge substantially from what any individual investor actually experienced in their account. A manager who returned 15% per year on a TWR basis is genuinely skilled, but an investor who poured in money at the peak and pulled it out at the trough may have earned far less. For performance attribution, TWR is indispensable; for personal financial planning, the dollar-weighted return is usually more relevant.
Example
A portfolio starts January at $100,000. By June it grows to $110,000 (+10%), then the investor adds $50,000. The combined $160,000 falls to $152,000 by December (−5%). The TWR links the two sub-periods: 1.10 × 0.95 − 1 = 4.5%, reflecting the manager's actual performance independent of the mid-year contribution timing.
