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When weight gain is a good thing

May 9th, 2017 by

Important changes you can expect on your investment statements this year


As a woman over 50, I can vouch that weight gain does not usually bring happiness. Yet, as an investor, it’s all about gains—the more, the better!

When time isn’t money

On your investment statements, you may see the term “time-weighted returns” (more on this later). Starting this year, investment statements will show “money-weighted returns”. What’s the difference? Which one is better? The short answer is that both are valid, although there are pros and cons of each. 

Let’s have a look: Suppose best friends Sue and Jane each use the same adviser and invest the same amount in the same portfolio during the year. The portfolio does great in the first half of the year, but lags in the second half.

Sue invests $10,000 on January 1st. Her investments rise 20% in the first half of the year and drop by 10% in the second half. By the end of the year, her portfolio is worth $10,800.

Jane staggers her deposits. She invests $5,000 on January 1st and another $5,000 on July 1st. By the end of the year, Jane’s portfolio is worth $9,900.

It’s all about TIME for portfolio managers

For portfolio managers, it’s all about time. The time-weighted method shows the results of the manager’s investment decisions over a specific time-period; they’re not affected by client contributions or withdrawals. This allows managers to compare their results with those of others, as well as to industry benchmarks. 

The time-weighted return for the year for both Jane and Sue was a gain of 8%. 

It’s all about MONEY for investors

But from an investor’s point-of-view, it’s about gains and losses in the portfolio. At the end of the year, when her adviser tells Jane that her time-weighted investment return was 8%, she’s going to flip! But her advisor is correct. 

However, when using the money-weighted method, Jane’s return was minus 1%. That’s because money-weighted returns include cash flows, as well as the performance of the underlying investments.  

With no inflows or outflows from Sue’s portfolio, her money-weighted return is the same as her time-weighted return: a gain of 8%. But, because Jane added funds just before the market downturn, her money-weighted return is worse than her time-weighted return. (If she had added funds just before a market upturn, then her money-weighted return would be higher than her time-weighted return.)  

Money-weighted return is also called a “personal rate of return” since it accounts for the investment performance, as well as personal decisions to deposit or withdraw funds from the portfolio. 

One drawback of using money-weighted returns is you cannot compare them directly to market benchmark returns since the measurement methods differ. On the other hand, money-weighted returns more closely match your personal experiences of gains or losses in your portfolio. 

Let them eat cake

So, Sue takes the cake for her investment acumen of being fully invested during a market upturn. Sue can have her cake and eat it too, but I recommend sharing it with Jane. After all, friendships are far more important than investment gains.

Jun 24 2017 10:44am

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