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

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.

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.