In 2017, all Canadian investors will receive a new annual performance report that includes money-weighted rates of return instead of time-weighted. This is a change that was made by Canadian securities regulators in order to better reflect the performance of individual investors.
What is the difference between time weighted vs money weighted?
Time-weighted rate of return is the industry standard for calculating the performance of a managed investment portfolio. This method is considered more fair to a manager because it eliminates the potential for returns being skewed by large deposits or withdrawals time weighted vs money weighted requested by clients, as well as other changes that can affect the account size of an investor.
It also takes cash flows into consideration. It is a good measure of the actual performance of a portfolio.
Money-weighted rate of return is a more accurate measure of the overall performance of a portfolio, as it includes the compounded growth in the value of all funds within a set period. This measure is often called the internal rate of return, or IRR.
Does a time weighted return reflect cash inflows and outflows?
Dollar-weighted returns (DWRR) do reflect cash inflows and outflows, as well as the investment performance of the funds chosen by the investor. This means that periods in which more money is invested will contribute more to the overall return – which is why it is sometimes known as a ‘investor-centric’ approach to measuring returns.
This measurement is more difficult to calculate on your own than a time-weighted rate of return, since it is dependent on the exact timing of cash flows and withdrawals from a portfolio. However, it is more accurate and reliable for tracking broad market indices and other funds.
What are the benefits of money-weighted return?
In general, money-weighted returns are more appropriate for comparisons to other investors and investments. They are also more suited to analyzing the impact of changes in account balances over time, such as the effects of dollar-cost averaging.
They are also more consistent in their calculations, as they account for the full duration of a period. The downside, though, is that they can be more difficult to interpret.
Why is a money-weighted return more important than a time-weighted return?
The answer to this question lies in the way each measure compares an investment portfolio to its underlying underlying portfolio. In other words, a money-weighted return is more reflective of the overall return of an investment portfolio and therefore more relevant to the long-term objectives of an investor’s financial plan.
As a result, it is a more accurate and realistic measure of a portfolio’s overall performance than a time-weighted return. It is also a more transparent and credible measure of the performance of an investor’s portfolio, as it takes cash flow into account and includes the full duration of a period.