Every so often someone shows me their account and the headline number does not match the feeling. The dashboard says up thirty percent for the year, but the person swears they barely broke even, or they feel richer than the number suggests and cannot say why. Nine times out of ten the culprit is not a bug and not a bad memory. It is that the platform is reporting one kind of return and the person is living a different one. Once you separate the two, most of the confusion clears up, and what is left is actually useful information about your own behavior.
The two numbers are time-weighted return and money-weighted return. They answer different questions, and the whole trick is knowing which question you are actually asking.
What each number is really measuring
Time-weighted return measures the assets, not you. It chops the period into little slices every time money moves in or out, computes the return of each slice, and links them together. Because it resets around every deposit and withdrawal, the size and timing of those cash flows drop out entirely. What you are left with is the pure performance of whatever you were holding, as if you had put in one dollar at the start and never touched it. This is why fund managers and exchange dashboards love it. It is the fair way to grade the strategy or the fund, because the manager does not control when you fund the account, and it would be unfair to punish or reward them for your timing.
Money-weighted return measures you. It is the internal rate of return on your actual cash flows, so a deposit made right before a big run gets weighted heavily, and a deposit made right before a drawdown drags the whole number down. It answers the question you actually care about, which is roughly, given the money I put in and when I put it in, what rate did my capital actually compound at. If you dumped in a large deposit at the top and it promptly fell, money-weighted return knows, and time-weighted return does not.
Here is the cleanest way I have to keep them straight. Time-weighted grades the horse. Money-weighted grades the bet you placed on the horse.
Why the two disagree, with a concrete case
Say you start the year with a modest position. Over the first half it doubles. Feeling smart, you deposit a much larger sum. Over the second half the asset gives back a chunk of that gain. Time-weighted return links the strong first half with the weaker second half and might still land somewhere respectable, because it treats both halves as equal slices regardless of how much money was riding on each. Money-weighted return sees that most of your capital was only present for the ugly second half, and it comes out much lower, maybe even negative.
Neither number is lying. The asset genuinely did fine over the full period, which is the time-weighted story. Your money genuinely did poorly, because most of it showed up late, which is the money-weighted story. The gap between them is the price of your timing.
It runs the other way too. If you tend to add on weakness and sit still on strength, your money-weighted number will often beat your time-weighted number, because your biggest capital was present for the best recoveries. That gap, when it is positive, is one of the few honest signals that your instincts are working for you rather than against you.
How to compute both from statements
You do not need special software. You need your deposit and withdrawal history with dates, plus the account value at the start and end of the period. Then:
- List every external cash flow with its date and sign. Deposits are money in, withdrawals are money out. Ignore internal moves like a coin going up or down in price. Those are returns, not flows.
- Grab the account value the instant before each flow, and the value at the very start and very end of the window.
- For time-weighted return, compute the return of each sub-period between flows, using the value just before a flow as that slice's ending value. Multiply all the slice growth factors together, then subtract one. This is the linked, flow-free number.
- For money-weighted return, treat it as an internal rate of return problem. Line up every flow with its date, add the ending value as a final positive flow, and solve for the single rate that makes the present value of everything net to zero. A spreadsheet XIRR function does this in one cell, which is honestly the whole reason XIRR exists.
If pulling the value right before each deposit is a pain, a rough shortcut for money-weighted return is the Modified Dietz method, which weights each flow by the fraction of the period it was present rather than requiring a valuation at every flow. It is less exact than XIRR but far better than pretending the flows did not happen, and you can build it from the same statement data.
Reading the gap as a behavior diagnosis
Once you have both numbers for the same window, the interesting part is the difference between them, not either one alone. Line them up side by side over a few periods and a pattern usually shows up.
- Money-weighted consistently below time-weighted means your timing is costing you. You are probably adding size after runs and going quiet after drops, which is the classic performance-chasing shape. The assets were fine. Your entries were not.
- Money-weighted consistently above time-weighted means your timing is helping. You tend to have your largest capital present for the recoveries, which usually means you add on weakness and resist adding on euphoria.
- The two roughly equal means your cash flows are close to neutral, either because they are small relative to the account or because you deposit on a fixed schedule that ignores price. Dollar-cost averaging tends to land here, which is arguably the point of it.
One caution before you over-read a single quarter. A large one-time deposit can swing money-weighted return hard in either direction for reasons that have nothing to do with skill, so look across several periods before you conclude anything about your instincts. And do not use money-weighted return to compare yourself against a benchmark or a fund. Benchmarks are time-weighted by construction, so comparing your money-weighted number to an index return is apples to oranges. Use time-weighted for did I beat the market, and use money-weighted for did my decisions add or subtract.
If I could only pull one report each quarter, it would be these two lines on the same page for the same window. The headline return tells you what happened. The gap between these two tells you whether you helped or got in the way, and that is the part you can actually do something about next quarter.