M1 displays your return on your portfolio in one of two metrics: money-weighted rate of return (MWRR) and time-weighted rate of return (TWRR). TWRR shows the cumulative return of your underlying holdings, independent of cashflows:
Helps you compare your return relative to benchmarks (e.g., 60/40 stock/bond portfolio, S&P500)
Shows performance of your asset allocation and any changes to your asset allocation over the time period
Excludes the impact of your buys, sells, and cash flows
How is TWRR calculated?
We use the daily time-weighted return method to calculate your cumulative TWRR. This method calculates your daily return and excludes the impact of buys, sells, and cash flows.
Formula:
Cumulative TWRR: (1 + rt) * (1 + rt+1) * (1 + rt+2) - 1
r is your Pie’s daily return
Daily return (r): (Ending value - (Starting value + Cash flow)) / (Starting value)
Example:
Taylor’s Pie is valued at $10,000 on January 1. By the end of January 1, the Pie increases 10% in value to $11,000. Taylor then invests $9,000 into the Pie at the end of January 1, resulting in the Pie value of $20,000. On January 2, the Pie increases from $20,000 to $30,000.
Time-weighted rate of return:
Step 1: Calculate your daily return for each day in your time period
Day 1: ($20,000 - ($10,000 + $9,000)) / ($10,000) = 10%
Day 2: ($30,000 - ($20,000 + $0)) / ($20,000) = 50%
Step 2: Combine the daily returns with this formula
Cumulative TWRR: (1 + 10%) * (1 + 50%) - 1 = 65%
Simple rate of return:
($30,000 - $10,000) / ($10,000) = 200%
Money-weighted rate of return:
Present Value of outflow = Present Value of inflow
In this equation, r will represent your Pie’s MWRR.
$30,000 / (1 + r)1 = $10,000 / (1 + r)0 + $9,000 / (1 + r)^0.5
r or MWRR is ~79%
The simple rate of return does not remove the impact of the $9,000 purchase.
TWRR shows the performance of Taylor's underlying holdings increasing 10% on Day 1 and 50% on Day 2, but excludes the market timing impact of the $9,000 purchase. This allows Taylor to determine if their underlying holdings are performing well or poorly without purchases or sales skewing their returns. This can help Taylor determine if the underlying investment strategy is under- or outperforming their chosen benchmark.
MWRR shows the performance of Taylor's underlying holdings and their market timing. In this case, MWRR of 79% is greater than TWRR because MWRR reflects the benefit Taylor received with the large investment of $9,000 before the Pie value increased 50%.
TWRR and MWRR are both helpful measures of your investment performance, and they help investors answer different questions. It's important to remember they are not the only metrics to consider. It is important to understand the differences between MWRR, TWRR, and other return calculations to accurately assess the performance of your investments. To better understand the differences between MWRR and TWRR, view this article.
Brokerage accounts on the M1 platform are either fully disclosed to APEX Clearing or cleared through M1 Finance LLC. Please look at your account statement to determine how your account is cleared.
All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future performance. Using margin can add to these risks. Users utilizing APEX cleared margin accounts should review the APEX margin account risk disclosure before borrowing. Users utilizing M1 cleared margin accounts should review the M1 margin account risk disclosure before borrowing. M1 Margin Loans are available on margin accounts with at least $2,000 invested per account. Not available for Retirement or Custodial accounts. Margin rates may vary.
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