There are a few different ways to track performance in a portfolio. The two most popular are Internal Rate of Return (IRR) and Time-Weighted Return (TWR). At Rodgers & Associates, we use a Daily Valuation Time-Weighted Return (TWR) method.
What does that really mean? Simply put, Time-Weighted Return breaks up the return on an investment portfolio into separate intervals. This allows us to measure performance based on the assets available for investment each given day, and then aggregates or links those daily returns for a longer period of time. This is designed to eliminate the effects of cash flows (dollars added into the portfolio or dollars taken out) and just score the portfolio on the investments it holds.
The formula to calculate TWR is a little hairy but here it is…
TWR = [(1+HP1) X (1+HP2) x (1+HPn)] – 1
n= number of sub periods (in our case the number of days)
HP = (End Value – (Beginning Value + Cash Flow)) /(Beginning Value + Cash Flow)
HPn = Return for sub-period n
Side note: Fortunately, all of these calculations are performed by our portfolio software!
We generally don’t look at returns over a very brief time horizon, but for the sake of example, here’s how a hypothetical return for a seven-day period would be calculated:
|Day||Date||n||Beginning Value||Cash Flow||Ending Value||HPn||1+ HPn|
|Saturday (Market closed)||2/2/2020||2||$1,280,000||$0||$1,280,000||0.00000||1.00000|
|Sunday (Market closed)||2/3/2020||3||$1,280,000||$0||$1,280,000||0.00000||1.00000|
Cash Flow Interval 1 — Monthly distribution
Cash Flow Interval 5 — Roll over of cash from 401k
Sample 7‑Day Return Calculation
TWR = [(1+HP1) * (1+HP2) * (1+HPn)] — 1
TWR = [1.01266 * 1.00000 * 1.00000 * 0.99609 * 1.00678 * 1.00539 * 0.99799] — 1
TWR = 0.01896 or 1.896%
At Rodgers & Associates, our focus is on retirees and their financial needs so they can focus on enjoying themselves. No matter what phase of retirement you are in, we think that using Daily Valuation-Time Weighted Return as the performance reporting metric is essential to achieve an accurate measure of how a portfolio has changed over time.
Originally posted March 2020