Know Your Returns

With the end of the year fast approaching, attention will soon shift to reviewing 2018 as a whole and establishing how much progress has been made towards longer-term financial independence goals. Hopefully, the year is shaping up to be a great one for each of you!

Know Your Returns

A significant component of achieving long-term wealth will be the returns we aim to achieve from our investments, be they in savings, investments or pension assets. The general consensus among many FIRE bloggers is that long-run equity return expectations should be in the 7-8% range. While it’s a sweeping generalisation, I don’t disagree that this should be very much achievable over multiple market cycles.

The potential problem, however, lies in that the returns being referenced may not be reflective of the returns an investor would have actually received. Of course, investment fees and other charges play a part in this, but there is a more fundamental discrepancy between ‘what you see and what you get’.

In terms of our investments, it’s common to reference monthly factsheets or the investment managers website to see how a given fund has performed over time – whether as part of evaluating whether to invest in that fund, or referencing how that fund is performing after you’ve invested.

When weighing up a fund, for example, we are wired to want to choose funds that have a good track record. The figures that attract us and convince us to invest, however, will seldom match your own personal rate of return.

This is because the returns you see on such materials assume a few things

  • a single investment at the start of the period
  • the investment is held until the end of the period without any additional investment or withdrawals.

The technical name for this method of return is known as the Time-Weighed Rate of Return (TWRR) and it attempts to eliminate the distortions caused by the timing of new cash flows. Because of this, it is the universally accepted approach for comparative purposes – i.e comparing one fund versus another or a fund versus its stated benchmark.

However, as followers of financial independence, we will be striving to achieve a positive savings rate and direct our excess cash into our investment accounts be it through regular monthly contributions; periodic one-off lump sums or a combination of the two.

So, given it unlikely that we will be lump-sum, buy and hold investors, we need to understand that the size and timings of our cash flows into or out of our funds can have a material impact on our personal rates of return.

Depending on your investment provider or platform, you may be provided with a detailed breakdown of your personal rate of return, adjusted for the size and timing of your cash flows. This is certainly the way it should be but some providers are slow to adapt.

The technical term for this approach is the Money-Weighted Rate of Return (MWRR) and this approach does indeed adjust for the size and timing of cash flows. However, because of this, it is not considered appropriate when trying to evaluate and compare different portfolios as it is strongly influenced by the timing of cash flows and this timing could be outside the control of the fund manager and is often decided by you, the client.

Some platforms do a better job at this while others (particularly pension providers I find) are woeful at breaking down what you actually returned – instead they confuse you with the number of units held between two dates, change in absolute value etc.

If all this terminology is sending you to sleep, then perhaps a worked example will bring this difference to light 😉


Let’s say that, five years ago at the end of 2012, James decided to invest £15,000 into a global popular equity fund. Things go great and, over the four years that follow, the fund delivers solid returns. James knows this as he regularly checks the latest fund factsheet produced by the investment management firm running his fund.

As he has made no further contributions he figures this is a perfectly good proxy for how his money is growing and indeed his original £15,000 has grown to £28,605… sweet!

Buoyed by this progress James decides to top-up his investment with another £15,000 at the end of year four. However, the following year turns out to be a stinker 🙁

A year of turmoil shakes global equity markets and James’s fund cannot hide from the rout, ultimately declining 32% for the year….. ouch!

At the end of the fifth year, the value of James’s investment stands at just £29,652 (wiping out all of his previous gains and leaving him with a shade under his total cash investment of £30,000)

Here is a table of this activity in chronological order:

Date / Period Transaction / Fund Returns Fund



Gain or Loss

31st December 2012 £15,000 initial Investment £15,000
2013 +15% gain £17,250 £2,250
2014 +23% gain £21,218 £6,218
2015 +7% gain £22,703 £7,703
2016 +26% gain £28,605 £13,605
31st December 2016 £15,000 additional investment £43,605 £13,605
2017 -32% loss £29,652 -£348

A week or so later, the annual report and statement for his investment account arrives in the post from the investment management company running his fund. When he scans the document he notes that his personal rate of return for the 5-years invested is stated at -0.39%. This is no surprise to James as he can see he has lost money overall.

He decides to compare his personal rate of return with that of the advertised 5-year return for the fund on the manager’s website. To his shock, over the exact same period, the 5-year annualised return for the same fund is +5.36%.  

How can it be that the official fund return is more than 500 basis points different on average per year from what James personally achieved?

“This is MWRR vs TWRR in a nutshell!”

If we recalculate James’s return using the TWRR approach, we end up with a 5-year annualised return of +5.34% (almost the same as the reported fund return).

  • TWRR =  [(1.15) x (1.23) x (1.07) x (1.26) x (0.68)] ^ (1/5) -1 = +5.34%

But which is the right one? James can clearly see he has lost money as he is down -£348 on his contributed capital (£30,000) so he knows a positive return is not right.

As we learned before, the reason for this difference is that the MWRR is more dependant on when the contributions or withdrawals are actually made into or from the fund. In our example above, the timing was everything as James choose to double the amount he invested right on the eve of a major market decline – exposing a higher sum of his money to the resulting market crash, resulting in a lower return relative to the TWRR approach. Of course, he had no way of knowing this was about to happen.

The MWRR makes the most sense as its a better representation of how he has actually done.

In contrast, the TWRR ignores the contributions and withdrawals from the fund and the size and timing of them. In the example, James’s unfortunate timing of his second lump sum has no effect on this return. The calculation basically assumes that James invested £1 at the start of the period with no further contributions or withdrawals. This method of stating returns is, therefore, better for the managers of the funds who like to compare themselves to other managers and their benchmarks.

So, given a key strategy in any FIRE person is engineering a savings rate from which regular contributions are made into investment funds, the MWRR is always going to be a better reflection of your personal rate of return than time-weighted rates of returns the fund may quote in marketing materials. 

In the next article, I’ll outline some ways to calculate your personal rate of return, from the quick and dirty, to the in-depth MWRR shown here using a spreadsheet and the XIRR formula.

Of course, I should point out that the size and timings of cash flows can equally serve to boost the returns an investor achieves over the stated TWRR returns from the manager. Regardless, the point I am trying to illustrate is that you need to pay the greatest attention to what you actually return versus what the information may suggest.

So as always I appreciate your thoughts and opinions. Perhaps you have been judging the relative success of your investments by the quoted fund returns or perhaps you are a return calculating wizard;-)

Let me know your thoughts

Cheers and I hope the remainder of the year works out well on the investment front for you all.






This Post Has 2 Comments

  1. weenie

    Drip-feeding/pound-cost averaging to avoid trying to time the market with large lump sums?

  2. Pursue FIRE

    Hi Weenie – pound cost averaging will certainly ensure a smoother ride and we all know that trying to time the market is a foolish endeavor. So you could argue this is an extreme example but many people will contribute (or withdraw) from their accounts on an irregular basis (think lump sums following a bonus at work or, investing the proceeds from selling something etc).

    Regardless, whether you invest regularly every month or irregularly the money-weighted rate of return will still differ from the time-weighted rates of returns quoted on fund factsheets and materials. Some (like Vanguard) actually provide a money-weighted rate of return, others are terrible at providing any sense of your actual return.

    A good way to test the differential in a given month or period is to extract the personal rate of return from your Vanguard account (if you have one) – e.g. for the past 3 months and compare that to the quoted fund returns on the Vanguard website. Whether lump sum or regular investment I guarantee your return will be different from those shown, even after accounting for fees due to the effects of the size and timing of your cash flows in or out.

    If you are not familiar with the XIRR function in Excel or Google Sheets – I’m working on a post to demonstrate how to calculate your money-weighted rate of return in a spreadsheet.



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Hello and welcome to Pursue FIRE. My name is Dan and I am the owner and author of all content on this site. I am passionate about personal finance and look forward to engaging with you.
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