Calculating Your Time-Weighted Rate of Return (TWRR)

In this two-part video series, I’m going to show you two popular ways to calculate your portfolio’s rate of return. In today’s part 1 video, I’ll cover the time-weighted rate of return (TWRR). In part 2, we’ll take a look at your money-weighted rate of return (MWRR).
Please feel free to download the model portfolios from my blog before getting started:
www.canadianpor...
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[@JustinBenderCPM]

100% of KZbin revenues received by the Canadian Portfolio Manager channel have been donated to SickKids Foundation. If this video has helped save you a few dollars on fees or taxes, please consider donating a portion of your savings to SickKids Foundation: www.sickkidsfoundation.com/

[@hardikshah1792]

wow

[@ksn98]

I saw around 3 videos before landing here none of them was this much clear thanks a lot

[@edwardtolkachenko5362]

There is no other explanation like this on KZbin. Thank you!

[@hercules1345]

That is an absolutely genius explanation. I had a hard time understanding this concept until I watched this video. Thank you for your time!!

[@spamfrank8463]

Absolutely the best to the topic i have ever seen. Easy to understand. Perfect!!!

[@BrunoAlves-uy3sl]

Great topic, Justin. Thank you also for the editor to create the explanation graphics. They help a lot!

[@JustinBenderCPM]

@Bruno Alves - You're very welcome! Rate of return discussions can be very dry, so it definitely helps to add a dose of graphics/animations to the mix :)

[@coldavenue2325]

Justin and Shannon, the way you explain and present is stunning. It gives anyone with an internet access the chance to learn complicated things easily. The Millenials and younger people are given a treasure here on youtube. Knowledge will make the life of many people easier, reducing suffering in some way. Imagine at which level mankind could be, if even the kid in the back of beyond could fight his/hers way to prosperity just by utilizing knowledge from yt videos. This is so cool!

[@JustinBenderCPM]

@Cold Avenue - You just made our day! Thank you so much for watching (and for your kind words and support :)

[@ee-sj8qr]

preparing for my m6 exam and this is really useful for me to understand Time weighted rate of return

[@muhammadsyahmi240]

Fantastic, easy to understand explanation. You're a champ, thanks!

[@yaravallirohit8014]

Champion explanation, wow!

[@mike_strong]

Thank you, Justin! I have a client needing to do a return of excess for several years and the investment company is not doing the math correctly!

[@NaveenNagalingam]

Love the Arrested Development references! ;)

[@JustinBenderCPM]

@Naveen Nagalingam - I was hoping there would be some Arrested Development fans out there. Who better to have panic during a market downturn than Buster Bluth, who suffers from crippling panic attacks? ;)

[@portfedh]

This is the clearest explanation Ive seen on the topic. Thank you!

[@JustinBenderCPM]

@Pablo Cruz - You're very welcome - thanks for stopping by the channel! :)

[@sunsetspey]

Your TWRR whitepaper from several years ago is what prompted me to use the calculation so thanks. Regarding the last point on the logistics required to make use of the TWRR, while it is a bit of work to gather data, it is not too onerous unless there are a large number of cash flow events and/or positions in the portfolio. I'd argue that tracking spending over the course of a month for personal finance budgeting purposes is more difficult than the use case for the single asset allocation ETF holder that makes regular monthly contributions throughout the year. All they need to do is look up closing prices for a single security 12 times and use that as in input for the calculation you laid out in the video which is achievable with basic spreadsheet formula skills. For those that have many positions to track along with many cash flow events, the best solution I've found is the programmatic approach. For that solution, one will need basic programming skills and be familiar with REST in order to get historical closing price data from a data provider like Alphavantage or IEX that provide APIs. Questrade also has an API that is free for Questrade users but it uses OAuth which requires mode advanced knowledge and dev skills.

[@JustinBenderCPM]

@sunsetspey - An investor could look up the ETF price on the cash flow date and multiply it by the number of units held, but most DIY investors would struggle with this task. I correspond with thousands of DIYers each year, and their eyes would go crossed if I mentioned an API ... mine did ;)

[@markusdrexel2410]

Very helpful! Thanks

[@JustinBenderCPM]

@markusdrexel2410 - You're very welcome! :)

[@1996paulo1996]

Excellent video Justin. We are looking forward for part 2 and 3. Graphics help a lot to understand this topic

[@JustinBenderCPM]

@Paulo Ascurra - Glad you liked it! The next two videos will continue with the Michael/Gob/Buster example, so it should be relatively easy to follow along with.

[@OG-bb1bk]

Brother, you are amazing at explaining. Keep up the good work!

[@JustinBenderCPM]

@O G - Haha, I'll try my best ;)

[@allthingsconsdrble]

very helpful

[@mrs.t7008]

excellent explanation. can't wait for part 2!

[@JustinBenderCPM]

@Mrs. T - Glad you liked it! The second video should be released over the next couple weeks (it's just with our animator now).

[@darrent2478]

Excellent Video! Thanks for posting.

[@salmamarine1694]

You just saved my study night thank you 🙏🏻🙏🏻

[@JustinBenderCPM]

@Salma Marine - Haha - glad I could help ;) Good luck with your exam!

[@Aryan_singhal]

Very Helpful video, Justin!!!

[@JustinBenderCPM]

@Aryan Singhal - I'm glad you found it useful! 😀

[@shadrinan90]

Thank you for explanations! It helped me a lot!

[@knowledgeupdate879]

This video is Helpfull

[@seesharp3095]

Great explanation 👏👏👏

[@hishamalhashmi7394]

well explained

[@Helix5370]

Very nice video Justin. Looking forward to part 2.

[@JustinBenderCPM]

@Brian - I'll be editing part 2 this weekend, so it should be released in the next few weeks. We may even add a part 3 to the discussion (with the Modified Dietz rate of return).

[@chrissydieb5839]

@@JustinBenderCPM If you could add the modified Dietz rate, this would be amazing. 😍 I always avoided the subject until now because it sounded boring and poorly explained. But this video really changed my view on the topic. I’m already looking forward to part two. Thank you very much. ☺️ best regards from Switzerland. 🇨🇭🇨🇦

[@JustinBenderCPM]

@@chrissydieb5839 (from Switzerland) - You've sold me! I'll create a Modified Dietz video explainer as well, just for you :)

[@chrissydieb5839]

@@JustinBenderCPM Amazing - thank you so much! 😁😍

[@calebguo]

easy to understand. thanks a lot

[@JustinBenderCPM]

@Caleb Guo - I'm glad I was able to make this dry topic somewhat digestible :)

[@adbp473]

I'm sure someone has created an 'app' for that. If not, looks like your the man for the job!

[@JustinBenderCPM]

@David Bateson - Challenge accepted! ;)

[@alain001]

@@JustinBenderCPM How is it going? ;-) I could use some formula's right now. Making my own advanced portfolio tracker and this is the next step 😃

[@JustinBenderCPM]

@@alain001 Things are going well! Hopefully the same goes for you :) I've included a link to our rate of return white paper, which includes all the formulas: www.pwlcapital.com/wp-content/uploads/2018/06/2015-07-10_PWL_Bender-Bortolotti_Understanding-your-portfolio-s-rate-of-return_Hyperlinked.pdf

[@ramesherrabolu1590]

Thanks for the video. I wish I knew TWRR didn't include cash inflows/outflows. TWRR may be suitable for many except the investor who's either adding or removing money. I would like to know which reporting scheme is the best from investors' POV. It is easy to imagine two investors contributing the same amounts and yet have different balances in their accounts. That would be a strong argument against using TWRR for most investors. I wish the regulatory agencies took note of this GAPING HOLE.

[@hakansepik6280]

Great Video

[@JustinBenderCPM]

@Hakan Sepik - Thanks for watching :)

[@mohammedshabeer3920]

Hello Justin, thanks for the detailed video, this is very helpful. I do have a question, why do we still have to split the time period for Michael in your example at 3:27, since there were no contributions or withdrawals and when should we use TWR v/s Holding Period Return?

[@JustinBenderCPM]

MOHAMMED SHABEER - For Michael, you don't need to split the time period. I just wanted to show investors that if you do, the sub-period returns are identical to Gob and Buster.

[@phoenixchemistry4325]

Hello Justin, Thanks for you Video. I have a quastion: How do you do these Animations? I like the effects for example the slow graph animation. How are you doing these? It would help me as a chemist a lot to improve my presentation skills. Thanks a lot for your respond!

[@JustinBenderCPM]

@PhoenixChemistry - Ryan Conlin takes care of the animations in my videos: ryanconlin.com/work

[@joytheboy7730]

Don't we need to Root (^1/2) at the end (prior to subtracting 1 for the rate) when finding the geometric mean?

[@JustinBenderCPM]

@joytheboy7730 - If you had calculated a total return over a 2-year time period, and wanted to annualize this total return (i.e., calculate an "average" annual return), then you would need to add 1 to the total return, take that to the power of (1/2), and subtract 1 to calculate the annualized return. This calculation is over a 1-year time period, so you don't need to annualize the return.

[@yousifsalmoon3100]

why we did not take the square root when we did the geometric linking, because in other example we take the square root, just like a geometric mean

[@JustinBenderCPM]

@yousifsalmoon3100 - If you had calculated a total return over a 2-year time period, and wanted to annualize this total return (i.e., "average" the total return), then you would need to add 1 to the total return, take that to the power of (1/2), and subtract 1 to calculate the annualized return. This calculation is over a 1-year time period, so you don't need to annualize the return.

[@Simon-te3gu]

Hello, does it work with different sub-periods? Like 6 months and 16 months if there are withdrawals and increasing at different period of the year. Thanks

[@mihirkumar2887]

sir dont we have to power the (1.1083)^1/2 -1 then it works out to be around 20.83% why are we not doing this step we are directly minus the 1 from it but the formula of gm is ​ [(1+R1)×(1+R2)×(1+R3)…×(1+Rn)]^1/n −1 where: R=Return n=Count of the numbers in the series ​

[@JustinBenderCPM]

@Mihir Kumar - No - why do you feel you should be doing this?

[@mihirkumar2887]

@@JustinBenderCPM I do not know sir i saw the formula online can you please guide

[@a.j.4644]

Not to be an ad, but my WealthSimple accounts provide me all the numbers discussed here. They do multiple types of return calculations, too. Not hard at all.

[@portfedh]

You're right, but its really useful to understand what each return is tracking and when to use each type.

[@chansonjoy]

the geometric link sub return equation is confusing.

[@Azel247]

Let's say I have an account open for 10 years. For the first 9 years there was $0 in it. Between year 9 and 10, I deposited 500k into it and earned a 10% rate of return that year. Would the TWRR be 1% annually?

[@JustinBenderCPM]

@Nicol Bolas. If you had an account with $0 for 9 years, you wouldn't calculate a rate of return (because you have nothing invested).

[@Azel247]

@@JustinBenderCPM What if you have a very low amount, like $1K in it? I ask because I think that's how my bank calculates to return automatically.

[@DarkSech]

Thank you for the video! I have a question: is it possible to calculate the TWRR if there are withdrawals of 100% from the portfolio? In the Buster example, what would be the calculation if he withdrew the whole sum of 77,985 and then re-invested it some time later, for example on 01-05-2020?

[@JustinBenderCPM]

@Christian Cardin - If the entire portfolio were to be depleted, the rate of return calculation process would end (so you couldn't combine the returns in this scenario).

[@arghamukherjee2969]

Hello Justin, thanks for the video. I was struggling to get the concept and your video helped me to understand the concept. I have a question for you. If I own a portfolio where I own buy and sell. so buy and sell can happen through the year, than how someone would calculate the annual return? for example on 1st Jan 2021 I bought 3 tesla and 4 apple stocks, next on feb2, added 2 more apple then march 5, sold 1 tesla and book some profit of 10 USD, later on, April 10th, reinvested the gain on some ETF and this goes on. so how would I calculate the annual rate of return? if I use TWRR then how I should split the intervals? Thanks

[@JustinBenderCPM]

@Argha Mukherjee - Your buying and selling is not relevant for calculating your rate of return - you just need to know your starting portfolio value, and the portfolio value whenever you add money to the portfolio or withdraw money from it (selling a holding is not considered a withdrawal).

[@arghamukherjee2969]

@@JustinBenderCPM yes perfect, clear now. Thank You.

[@HerdofFire]

I'm struggling trying to go back and figure out what my portfolio values were before cash flow since my account statements only give end-of-month values. Any suggestions?

[@JustinBenderCPM]

@MustbeCanadian - this is a big issue with calculating your TWRR (lack of data). Unless your brokerage provides this information (most do not), it's not going to be practical to track the daily values (I don't have any reasonable suggestions). Hopefully my money-weighted rate of return and Modified Dietz rate of return videos will provide you with some reasonable solutions.

[@ee-sj8qr]

where can i learn on modified dietz method

[@JustinBenderCPM]

@e e - In our Modified Dietz Method video :) kzbin.info/www/bejne/hZ3dXp-spdWHis0

[@napalm8030]

Lmfaoooo, Buster 😂

[@newmercies1]

I thought for TWRR for a period over a year we should use the geometric mean instead...!

[@paddyspub7928]

Bluths in the house. Of course Buster would panic.

[@lh7766]

👏

[@galinaskvortsova1924]

Why can't we just calculate IRR using excel to get accurate return?

[@JustinBenderCPM]

@galinaskvortsova1924 - Please refer to this link to calculate the IRR (or "money-weighted") return using Excel: kzbin.info/www/bejne/iKqwgqNjhtlrZ8k

[@K_H-Channel]

Hi there, What are your thoughts on investing in Split funds and Covered call ETF's that gives high dividends instead of Vanguard growth ETF's for a portfolio about 300k? I am 35 and have at least 20 years to invest. Since I have 20 years, I like to think that I have high risk tolerance. I am investing aggressively. I want the growth, But I also would like to start getting paid at some point. So I won't have to work until I am 65+. Help me decide please. Thank you.

[@JustinBenderCPM]

@K H: My suggested ETF portfolios are posted on my CPM blog (they do not include split funds or covered call ETFs that give high dividends, if that helps to answer your question): www.canadianportfoliomanagerblog.com/model-etf-portfolios/

[@K_H-Channel]

@@JustinBenderCPM I have read the blog. Great information. I was just wondering your thoughts on passive income investing vs growth investing. Thank you.

[@JustinBenderCPM]

@@K_H-Channel - Most investors should start (and end) with a broad-market index strategy. There's no need to go more exotic than that (it's all just a huge distraction).

[@BenHC]

@@K_H-Channel Dividends/passive income are very tax inefficient both in general and particularly during accumulation. During accumulation you're forced to pay taxes on the dividends as they're paid out, meanwhile capital gains only get taxed on sale. Even if you're not in accumulation phase, $1000 of dividends will be taxed more harshly then selling $1000 from a portfolio of assets that have appreciated. There may be some psychological benefits from "passive income" but total portfolio growth is what matters and dividends create a significant drag on that.

[@K_H-Channel]

@@BenHC Tax is not an issue for RRSP and TFSA accounts correct? I understand that tax needs to be payed from non-registered accounts. The other thing I am trying to understand is if I use a growth portfolio for next 30 years i might become a millionaire. But I will be 65. I’m 35 now. The question I have is is how to grow a portfolio and start getting paid so I can retire early. May be there is a mix of these two methods? So I can grow my portfolio for next 10-15 years and then switch to dividend income funds. So I can start getting paid? Or is there a better way? At the end of the day we do all this to get paid and retire early. So we can enjoy our life.

[@AlexanderDiArmani]

This made no sense tho I don't question the math. The guy who bought at the bottom clearly has a higher return than others. In fact, I would take the end number and deduct the contribution ($10,000) and get the percentage. In this case, the blue's return is 15.03%.

[@UnsaltedCashew38]

What's with the thumbnail? Are you calling yourself a dork with the glasses and calculator or the audience that wants to learn stuff?

[@JustinBenderCPM]

@MartyisGreat2020 - All of the above ;)