Time-weighted and dollar-weighted returns are two common methods used to evaluate investment performance. A time-weighted return measures how an investment performed independently of cash flows—essentially answering, “How did the asset itself do over time?” A dollar-weighted return, by contrast, factors in the timing and size of contributions and withdrawals, showing how the investment performed for a specific investor. Understanding the difference can help you assess returns more accurately based on your own investment behavior. For personalized insight, consider matching with a financial advisor.
What Is a Time-Weighted Return?
A time-weighted return (TWR) measures an asset’s performance over a defined period without factoring in the amount or timing of cash flows. Instead, it isolates the return of the investment itself, regardless of when or how much money an investor contributes or withdraws.
How it’s Calculated
The time-weighted return is calculated by breaking the full investment period into sub-periods whenever there is a cash flow (contributions or withdrawals). Each sub-period’s return is calculated independently, so the amount of the cash flow doesn’t affect the return. Only the market performance within each sub-period is measured.
Then, those sub-period returns are compounded to produce the final time-weighted return. The general formula is:
(1 + r¹) x (1 + r²)… – 1 = TWR
(Note: r¹ and r² are the returns from each sub-period)
For example, imagine that you invest $100,000 in a portfolio. In the first year, the portfolio grows by 10%. You then invest another $50,000 into the portfolio, bringing the balance to $165,000. In the second year, the portfolio declines by 5%.
To determine your time-weighted return, you would calculate the return for each year—10% and -5%—then average them geometrically. As a result, your TWR would be approximately 4.5% over the two years. This figure reflects only the investment performance, not the impact of adding $50,000 in the middle.
What Is a Dollar-Weighted Return?

Dollar-weighted return (DWR) measures the return that an individual investor would receive from an asset over a period of time based on their own pattern of investment, withdrawal and cash flow. Also known as internal rate of return (IRR), this approach considers how much was invested and when, so results will vary from one investor to another even if they hold the same asset.
Because dollar-weighted return incorporates the effect of contributions and withdrawals, it’s particularly useful for evaluating the performance of accounts with irregular cash flows, such as brokerage or retirement accounts with ongoing deposits. However, it can be skewed by poorly timed investments, making it less reliable for comparing investment managers or strategies across different portfolios.
How it’s Calculated
To calculate a dollar-weighted return, start by listing each cash flow. Include every time you put money in (as a negative number) and every time you take money out or end with a final value (as a positive number).
Then, arrange the cash flows in order. Start with the first date, then go in order until the end of the investment.
Calculating dollar-weighted returns is difficult to do by hand, so use a calculator or spreadsheet. For example, you can use the IRR() function in Excel, Google Sheets or a financial calculator. Just enter your list of cash flows, and it will give you the return.
Time-Weighted vs. Dollar-Weighted Return
Time-weighted and dollar-weighted returns will match when there are no cash flows—such as when a lump sum is invested at the start and held without change until the end. In this case, performance reflects only the investment’s price movement.
The two measures begin to diverge when cash flows like contributions or withdrawals occur during the investment period. Dollar-weighted return captures the impact of these flows, while time-weighted return removes them by calculating sub-period returns and linking them geometrically.
To illustrate this, consider two investors—Investor A and Investor B—who bought shares of a company at different times over the course of the year. The stock traded at the following prices on different dates:
- Jan. 1: $20
- Mar. 1: $25
- Aug. 1: $18
- Dec. 31: $22
Investor A bought $500 worth of stock at $20 per share on Jan. 1. On March 1, after seeing the price go up, he invested another $500 at $25 per share. On Dec. 31, he had 45 shares of stock worth $990 (45 shares x $22 per share).
- Time-weighted return: 10.0%
- Dollar-weighted return: –0.40%
Investor A’s time-weighted return matches the overall price movement, but his additional investment came just before a drop, reducing his actual return when measured using dollar-weighted methodology.
Investor B also invested $500 on Jan. 1 at $20, buying 25 shares. On Aug. 1, after the price fell, she added $504 at $18, purchasing 28 more shares. By Dec. 31, her 53 shares were worth $1,166 (53 × $22). Her time- and dollar-weighted returns are as follows:
- Time-weighted return: 10.0%
- Dollar-weighted return: 7.64%
Investor B’s investments tracked the same price performance, but because her second contribution came before a rebound, her dollar-weighted return benefited from better timing
Bottom Line

Investment returns can be measured in more than one way, and each method tells a different story. One shows how the investment itself performed over time, regardless of investor behavior; the other reflects the outcome based on actual decisions and cash flow timing. While both approaches offer insight, their usefulness depends on what you’re trying to understand—how an asset behaved in the market or how your choices affected the result. Comparing the two can reveal not just how a portfolio performed, but how well it was managed along the way.
Investment Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While it’s possible to occasionally predict short-term moves, studies show how difficult it is to consistently time market entries and exits with precision. Attempting to time the market can backfire if you’re out during major rebound days. Historically, a few strong days each year contribute disproportionately to total returns.
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