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 for investment or dollars distributed back to the client) and just score the portfolio on the investments it holds.
The formula to calculate TWR is a little scary…
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. Retirees are in that wonderful and rewarding time of life commonly known as The Golden Years. It is time to reap what has been sown. It is also a time to consolidate assets from former employers and personal investment savings. Therefore, using Daily Valuation-Time Weighted Return as our performance reporting metric is essential to achieve an accurate measure of how a portfolio has changed over time.