Why Your Broker Statement's Return Number Can Surprise You

Two numbers, one account, no villain

Picture this. You open your broker statement after a decent year. One line says your portfolio returned about 20%. Another line, maybe on a different page, suggests something closer to 8%. Same account. Same twelve months. You have not been hacked, and nobody is quietly skimming your chai budget.

What you are looking at, most likely, is two different measurement methods sitting side by side: the time-weighted return and the money-weighted return. Both are legitimate. They simply answer different questions, and once you see which question each one answers, statements stop feeling like riddles.

What a "return" is actually trying to say

A return is just a percentage that turns a pile of money into a single readable figure. The trouble is that money rarely sits still. You add a bonus in March. You pull cash out for a house deposit in September. Each of those movements changes the size of the pot, and different methods treat those changes very differently.

A useful illustration: suppose you invest $1,000 and a year later it is worth $1,500. You then add a $2,000 bonus, and a week later the portfolio has edged up another 1%, to $3,535. Depending on the method, the answer for that stretch comes out around 17.83%, 51.5% or roughly 50.7% a year. None of those is wrong. They are three answers to three different questions.

Time-weighted return: grading the investments

Time-weighted return, often shortened to TWR, was built so that fund managers could be judged on their decisions alone, without an investor's deposits and withdrawals muddying the picture. The method splits the period at every cash flow, measures each stretch separately, then chains the results together.

The practical effect is that a large deposit halfway through the year does not get extra say over the annual figure. The second half of the year does not shout louder than the first simply because more money was sitting there. As one plain description puts it, TWR depends on how long money has been in the portfolio, not on how much of it there was.

That makes it the natural choice when you want to compare a strategy against an index or an exchange-traded fund. An index has no cash flows at all, so anything you compare it to needs the same neutrality. Industry and regulatory practice leans this way too: the Global Investment Performance Standards, the widely used rulebook for presenting investment performance, default to time-weighted return for strategy-level reporting, precisely because managers do not control when clients add or remove money.

TWR has a blind spot worth knowing. Because it ignores portfolio size, it can report a healthy gain on an account that actually lost money. In the worked example, a portfolio that rose 50% while only $1,000 was invested and then fell 20% while $3,500 was invested still shows a positive time-weighted return of 20%, even though the investor put in $3,000 and holds $2,800. Correct for grading a manager. Somewhat unhelpful for grading your own month.

Money-weighted return: grading your actual experience

Money-weighted return, also called dollar-weighted return or, in corporate finance, the internal rate of return, asks a different question: what did your dollars actually earn, given exactly when they arrived and left?

The method solves for the single rate that equates everything you paid in with everything you got back, including what the portfolio is worth now. Money added just before a rally pulls the figure up. Money added just before a flat stretch pulls it down. Periods when the portfolio was largest carry the most weight, which is what "dollar-weighted" means.

A simple scene shows why this matters. Imagine an account of $1,000,000 that gains 20% in the first half of the year. Then a large $2,000,000 contribution arrives, and the second half is flat. Time-weighted return lands near 20%, because the strategy did capture that rally. Money-weighted return comes out much lower, because most of the capital only ever experienced the flat half. Both numbers are accurate. One describes the manager. The other describes you.

There is a fair criticism here, and it is worth stating plainly. Money-weighted return grades the timing of your cash flows even when that timing had nothing to do with investing judgment. If your deposits are driven by payroll, and a bonus lands the day it lands, the resulting figure reflects luck as much as skill.

Why statement numbers so often disagree

Most brokerage statements show a simple return, the gain divided by the amount invested, because it is the easiest figure to pull from account records. Funds and managed accounts more often report time-weighted return, the standard for published performance. Add a money-weighted figure and you have three methods in the same industry, all defensible.

All three give identical answers in exactly one situation: when no money enters or leaves after the initial investment. With a single deposit at the start, there is only one stretch to measure, one cash flow to discount, and one capital figure. Every difference between the methods is created by later cash flows. Your deposits are not a flaw in the maths. They are the maths.

A divergence worth paying attention to

When the two figures drift far apart, that gap is a signal rather than an error. A positive time-weighted return paired with a negative money-weighted return means the investments performed reasonably, but most of your money arrived before the weaker stretches. The reverse means good timing rescued mediocre holdings. Seeing both separates the quality of what you own from the timing of when you bought it.

Before comparing any two return figures, check the basis. A difference in method can easily be larger than a difference in actual performance. And be careful with annualisation: money-weighted return is already an annual rate, while simple and time-weighted returns are cumulative over whatever period you measured.

Where rules and jurisdiction come in

Disclosure expectations are not uniform, and this is where a little caution helps. In Europe, the European Securities and Markets Authority has issued guidance on how investment funds should disclose benchmarks and past performance, including that performance shown against a named benchmark should be consistent with performance disclosure in other investor communications. That points toward consistency, but it does not settle which return method appears on your particular statement.

Elsewhere, regulators have focused on other ground. The US Commodity Futures Trading Commission has approved National Futures Association rules requiring retail forex dealers to publish additional performance disclosures, including, in quarterly reporting, the total number of non-discretionary retail forex customer accounts and the percentage that were profitable versus not. That is a different kind of disclosure from the return-method question, and it is a reminder that requirements vary by product, country and account type.

So treat your statement as a document with a method behind it, not a verdict. If the number puzzles you, ask which method was used — a short, entirely reasonable question that firms should be able to answer in plain language. Good reporting does not pick a favourite between the two measures. It shows both, with a sentence explaining what each one is telling you.