Comments on: Time-Weighted vs Dollar-Weighted Returns

By: Patrick

Patrick — Tue, 05 May 2009 15:21:06 +0000

This just reminded me of another paradox, so I've described it here.

By: Preet

Preet — Tue, 05 May 2009 13:09:05 +0000

@Patrick – sounds like the contrarian would prosper… :)

By: Patrick

Patrick — Mon, 04 May 2009 19:18:09 +0000

@Preet – interesting. There’s a paradoxical aspect to this. If you look at time-weighted averages, you may chase the best performers, causing your own return to look more like the dollar-weighted average. However, if you look at dollar-weighted averages, you’re less likely to shift your money around, making your returns look like the time-weighted ones.

In short, whichever average you choose to compare your options, your returns will always look more like the other one!

By: Preet

Preet — Mon, 04 May 2009 18:37:40 +0000

@Justin – fair, but in my mind I was framing it from a behavioural finance slant. It is specifically the better time-weighted return which can attract an investor to a fund in the first place, which can lead to a poor dollar weighted return (which is what you will use to judge your initial decision and perhaps attract you to dumping the fund, and perhaps at the wrong time.)

By: Justin

Justin — Mon, 04 May 2009 18:27:31 +0000

Preet,

Good explanation. However, I would disagree on the overall tone of the article. If you are invested in a fund then you will want YOUR rate of return calculated on a dollar weighted average, since that is what you recieved. However, if you are a NEW investor, then the time weighted is generally much better indicator of performance since it is not biased by cash flows and are more representative of what you would have recieved if you started and where invested in the fund since inception.

By: TKO from Ontario

TKO from Ontario — Mon, 22 Dec 2008 03:14:46 +0000

Greetings from Bogota, Colombia.

Get well soon Preet, I heard that ‘Bombay Runs’ are a pain in the arse.

I miss the Friday vids, so I thought I might post one.
Hope you all like it:

http://www.youtube.com/watch?v=Lbwp0OTk0Hs

Merry Christmas from my family to yours

By: An Example of How Performance Chasing Damages Wealth : WhereDoesAllMyMoneyGo.com

An Example of How Performance Chasing Damages Wealth : WhereDoesAllMyMoneyGo.com — Sat, 20 Dec 2008 05:19:26 +0000

[...] Yesterday’s post explained the difference between time-weighted returns and dollar-weighted re… If you read between the lines you’ll have noticed that negative excess returns of dollar-weighted returns over time-weighted returns would indicate a proclivity to performance chase by investors. Perhaps the best proof comes from Russel Kinnel who examined both the time-weighted returns and dollar-weighted returns of various mutual fund categories (US data), through April 2005: [...]

By: Preet

Preet — Fri, 19 Dec 2008 15:14:56 +0000

@Patrick – It’s another piece of the puzzle for investors to consider, and if you are invested from day one of the time period you are looking at then you are correct in that time-weighted returns is more relevant. But dollar weighted returns reflect the actual experience of investors – the next post will highlight some data that shows the significance of this point.

By: Patrick

Patrick — Fri, 19 Dec 2008 14:19:12 +0000

But why does that matter? Aren’t time-weighted returns more relevant? If I’m choosing a fund, I don’t particularly care that other investors had unlucky timing.