Understanding your investment return

If you are new to investing or interested in learning more about the performance of your portfolio, understanding how your investment return is calculated is a great place to start.

Time-weighted return vs. dollar-weighted return

Returns can vary based on when you buy your investments. The two ways to calculate a rate of return are time-weighted return and dollar-weighted return.

Both methods are useful, but each evaluates a different type of performance. A time‑weighted rate of return, which helps in evaluating the performance of a fund or how a portfolio manager has performed, measures an investment’s return.

A dollar-weighted rate of return, which helps in evaluating the overall performance of an account after your personal account activities (such as contributions and withdrawals) have been factored in, measures your personal return.

As an investment fund manager, Fidelity uses the time-weighted methodology when reporting returns of the funds we manage.

Comparison: Time-weighted vs. dollar-weighted return

Return type What it
measures
Best for
evaluating
Answer the
question(s)
Time-weighted (investment return) Investment return for a specific period. The performance of the specific investment or portfolio manager

Comparing two different instruments
How did the investment perform during a specific period?

How did the portfolio manager perform?
Dollar-weighted (personal rate of return) Account return, including
1. changes in the account value and

2. the impact of the amount and timing of contributions and withdrawals.
Personal return factoring in the impact of contributions and withdrawals. What was my personal return, factoring in the contributions/withdrawals that I made during a specific period?

 

Let’s consider the following hypothetical example of three investors. Tom, Jill and Adam all purchased shares of a mutual fund (Fund A).

Fund A started the year at a price of $10 per unit. It then moved down and up before closing the year at $11 per unit. The Fund’s investment return for the year is 10%.

As shown in the table below, the time‑weighted return is identical for all three investors. However, the dollar‑weighted rate of return varies for each investor according to the size and timing of their contributions and withdrawals.

    Tom   Jill   Adam
Starting investment   $100   $50   $20
Additional purchases
during the year
  $0   $50
  (March 31)
  $80
  (May 31)
Total amount invested   $100   $100   $100
Time-weighted
(investment return)
  10%   10%   10%
Dollar-weighted
(personal rate of return)
  10%   19%   -15%
Ending account value
(Investment return +/- cash flows)
  $110   $116   $90

Time-weighted return and dollar-weighted return are two different ways to measure the return experience of an investment. If you want to know what return your account earned when you factor in the timing and magnitude of cash flows, the dollar-weighted return method is the right one to use. If you want to evaluate the performance of your investment or investment manager, independent of your own activities, a time-weighted return is more appropriate.

 



Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund’s or ETF’s prospectus, which contains detailed investment information, before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.

The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor's investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

Certain Statements in this commentary may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and assuming no changes to applicable tax or other laws or government regulation. Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable and, accordingly, may prove to be incorrect at a future date. FLS are not guarantees of future performance, and actual events could differ materially from those expressed or implied in any FLS. A number of important factors can contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition and catastrophic events. You should avoid placing any undue reliance on FLS. Further, there is no specific intentional of updating any FLS whether as a result of new information, future events or otherwise.

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