What are time-weighted returns?
Your time-weighted returns show how your investments have performed over the time you’ve held them without being skewed by your contributions and withdrawals.
How are time-weighted returns calculated?
To calculate your time-weighted returns, each of your contributions or withdrawals (we call these cash flows) are weighted according to how old they are. We assume that an older cash flow would have been subjected to more market movement than a newer one. We’ve included an example below, but you don’t need to worry about doing these calculations yourself as we do them for you in-app.
For example, if you contributed £100 at the start of the year, then at the end of the year, you decided to contribute another £1,000 and your current earnings (your overall gain or loss plus any fees and bonuses) at that time was £5. With time-weighted return calculation, it assumes that the £5 was earned from the £100 contributions made a year ago instead of the £1,000 new contributions. In this example, your time-weighted return is 5% (calculated by dividing £5 by £100).
At Moneybox, we know that a lot of our customers make regular deposits, but also need to withdraw from time to time. That’s why your time-weighted return is a useful way to see how well your investments have performed without being skewed by your contributions and withdrawals.
Lifetime time-weighted return vs annualised time-weighted return
In addition to lifetime time-weighted return, we also display your annualised time-weighted return if you first contributed into your account more than 12 months ago. Annualised time-weighted return is useful because it can be compared to the annual equivalent rate (AER), which is the interest rate offered by a savings account.
So, if you made the same contributions and withdrawals into both your investment and savings accounts, you’d be able to directly compare the returns by comparing the interest rate on your savings account to annualised time-weighted return on your investing account.