Should I be looking at money or time weighted return for my investments?

Hi!

Time weighted return gives the compounded rate of return of one unit of money. It is not affected by timing or the size of the cash flows. This can be used to compare the returns of funds to get an unbiased opinion on performance.

Money weighted returns gives the rate of return of all the funds invested over the evaluation period. It gives the rate which equates the beginning and ending value of the investment and is affected by the timing of cash flows. Hence, while making a comparison between two investment opportunities, the same return concept shall be applied to both to arrive at a correct investment decision.

I work at kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.

I suppose you are doing the weighting to compare different potential investment options. You need to do both weightings to ensure a proper 'like with like' comparison. Illustrating using a couple of examples:

For money weighting - suppose you had one investments with two parts:

$100 with 60% return

$400 with 10% return.

The return from investing this is is not the simple average of the two returns (ie 35%) as the larger investment has larger impact - the actual return is only 20% (average weighted by investment amount). It is this weighted return that you should use to compare against other investment options.

On the time weighting side -

Suppose two investment choices giving return:

• 1% over 1 month
• 16% over two years

The equivalent per annum (year) return is 12%/8% - so the former is actually better. (note this assumes that for the first option you could continually reinvest)

This type of analysis would be covered in most textbooks on project return evaluation if you are interested in other points that should be considered to ensure proper comparison on which option is best.