Time-Weighted vs Money-Weighted Return: Why Your Broker's Number Lies
Your Wealthsimple or Questrade account shows a personal rate of return — and it almost certainly does not match what the S&P 500 returned over the same period, even if you hold nothing but index funds. The reason is not a bug. It is math: two completely different definitions of "return" are at war, and your broker is using the one that flatters cash-flow timing rather than the one investment managers use. Understanding the difference between money-weighted return and time-weighted return — and why Modified-Dietz is the bridge between them — is the single most important concept for any Canadian DIY investor who wants to benchmark honestly.
The Problem: Two Numbers, Two Different Questions
Every return calculation answers a specific question. Before comparing numbers, you need to know which question is being asked.
- Money-Weighted Return (MWR / IRR): "What annual return did I earn, given the exact timing and size of my deposits and withdrawals?"
- Time-Weighted Return (TWR): "What return did the portfolio strategy earn, stripping out the distortion caused by when I happened to add or pull money?"
Neither is wrong. They answer different questions. The confusion — and the frustration — comes from using one when you need the other.
What Brokers Actually Show You
Canadian brokers (Wealthsimple, Questrade, Disnat) display a personal rate of return that is, in practice, a money-weighted return. It blends the portfolio's performance with your deposit schedule. If you happened to dump a large lump sum in right before a crash, your MWR craters. If you poured cash in right before a rally, your MWR soars — even though the underlying fund did exactly what it always does.
This is not your broker lying to you maliciously. It is a technically legitimate answer to the question "how did your specific dollars grow?" But it is the wrong question when you want to know whether your investment strategy is beating a benchmark.
| Investor | Contribution Timing | Money-Weighted Return (MWR) | Time-Weighted Return (TWR) |
|---|---|---|---|
| Investor A | $10,000 in January, adds nothing after | –20% | –20% |
| Investor B | $1,000 in January, then $50,000 in July — right before the drop | Deeply negative | –20% |
A Simple Example That Makes It Click
Imagine the TSX Composite is flat for the first six months of the year, then drops 20% in the second half.
- Investor A puts $10,000 in January, adds nothing. End result: –20%. MWR = TWR = –20%.
- Investor B puts $1,000 in January (before the flat period), then adds $50,000 in July — right before the 20% drop. MWR is deeply negative (dominated by the big deposit's bad timing). TWR is still –20% (same strategy, same market).
Investor B is not a worse investor than Investor A. They just had unfortunate timing on a large contribution. TWR isolates strategy quality; MWR measures dollar outcomes for your specific situation.
Why This Matters for Benchmarking
When you read that the S&P 500 returned 12% last year, that number is a time-weighted return — it assumes a single hypothetical dollar invested at the start, held to the end, with no cash flows distorting the calculation. Comparing that to your broker's MWR is an apples-to-oranges exercise. You could underperform the index by 5 percentage points purely because you happened to make a large RRSP contribution in February, not because your portfolio construction is flawed.
This is exactly why fair S&P 500 benchmarking for Canadian portfolios requires using your own TWR — not the number on your broker dashboard.
Enter Modified-Dietz: The Practical TWR Approximation
True time-weighted return requires knowing the exact portfolio value every single time a cash flow occurs. For a busy investor making biweekly RRSP contributions, that means dozens of valuation snapshots per year — data most Canadians simply do not have from their broker.
Modified-Dietz is the industry-standard approximation that solves this problem elegantly. The formula:
Modified-Dietz Return = (End Value − Start Value − Net Cash Flows) ÷ (Start Value + Weighted Cash Flows)
The "weighted" part is key: each cash flow is weighted by the fraction of the period it was actually in the portfolio. A $5,000 deposit made halfway through the year is counted as $2,500 in the denominator (0.5 × $5,000), because it only had half the year to work. This neutralizes the timing distortion without requiring daily valuations.
Modified-Dietz is the method recommended by the Global Investment Performance Standards (GIPS) and used by institutional portfolio managers worldwide when sub-period valuations are unavailable. It is the closest approximation to TWR that a retail investor can realistically compute — and it is what WealthWise uses under the hood to calculate your VS S&P 500 benchmark comparison.
Lean Time-Weighted Return (TWR)
- You're comparing your strategy to a benchmark like the S&P 500
- You're an accumulation-phase investor making regular contributions
- You want to know whether your strategy — not your timing — is outperforming
Lean Money-Weighted Return (MWR)
- You want to know whether the timing of your deposits, withdrawals or rebalancing added or destroyed real dollar wealth
- You're evaluating whether a retirement withdrawal plan is sustainable under real market conditions
- You're a decumulation-phase investor evaluating whether your draw-down plan is working in real conditions
When Money-Weighted Return Is Actually More Useful
MWR does have its place. If you want to know whether your investing behavior — your specific timing decisions — added or destroyed value, MWR is the right tool. Sequence-of-returns analysis, for instance, is inherently about cash-flow timing. If you are in the sequence-of-returns danger zone near retirement, MWR tells you whether your withdrawal schedule is sustainable given the order returns actually arrived.
For accumulation-phase investors comparing strategy to a benchmark, TWR (via Modified-Dietz) is correct. For decumulation-phase investors evaluating whether their draw-down plan is working in real conditions, MWR is correct. Know which phase you are in.
How WealthWise Solves This for You
Most Canadian investors have no practical way to compute their own Modified-Dietz TWR. Brokers do not publish it. Spreadsheets require manually recording every transaction with dates and values. This is the exact gap WealthWise is built to fill.
When you sync your broker or import a CSV, WealthWise logs every contribution and withdrawal with its date. It then applies Modified-Dietz across each sub-period, chains the results, and produces a time-weighted return for your actual portfolio — the same methodology used by fund managers. That TWR is then plotted against the S&P 500 (in CAD, currency-adjusted) over your exact holding period, so the comparison is genuinely apples-to-apples.
The result: you can finally answer "am I actually beating the index, or does it just feel that way because I got lucky on deposit timing?"
A Practical Comparison Table
| Feature | Money-Weighted Return | Time-Weighted Return (Modified-Dietz) |
|---|---|---|
| What it measures | Dollar growth for your specific cash flows | Strategy performance, timing-neutral |
| Affected by deposit timing? | Yes — strongly | No — neutralized |
| Comparable to index returns? | No | Yes |
| Used by fund managers for GIPS? | No | Yes |
| Useful for personal tax/wealth tracking? | Yes | Less so |
| What your broker shows | Typically yes | Rarely |
Common Misconceptions
"My return is lower than the index — I must be doing something wrong."
Not necessarily. If you made large contributions during a market dip that subsequently recovered, your MWR might be lower than TWR, making it look like you underperformed — when in fact your portfolio strategy matched the market exactly. Run the TWR comparison before drawing conclusions.
"TWR ignores real money outcomes."
It does not ignore them — it separates strategy quality from timing luck so you can evaluate each independently. Your MWR and TWR together tell a more complete story than either number alone.
"This only matters for large portfolios."
It matters most for investors making regular contributions — which is most Canadians using RRSP/TFSA contribution room steadily. The larger and more frequent your deposits, the bigger the gap between MWR and TWR.
The Takeaway
Your broker's personal rate of return is not a lie — it is just answering a different question than the one you probably want answered when comparing to a benchmark. For honest strategy evaluation, you need a time-weighted return, computed via Modified-Dietz, compared against an index return calculated the same way over the same period. That is the standard the investment industry uses, and it is the standard every DIY investor deserves access to — which is why it is a core feature of the best free portfolio trackers for Canadians.
Frequently asked questions
Does Wealthsimple show time-weighted or money-weighted return?
Wealthsimple displays a personal rate of return that is effectively money-weighted — it reflects how your specific dollars grew given the timing of your deposits and withdrawals. This is not directly comparable to published index returns, which are time-weighted.
What is Modified-Dietz and why does it matter?
Modified-Dietz is the industry-standard formula for approximating time-weighted return without needing daily portfolio valuations. It weights each cash flow by how long it was actually in the portfolio, neutralizing timing distortion. It is recommended by GIPS and used by professional portfolio managers worldwide.
Can I beat the S&P 500 without realizing it — or underperform without realizing it?
Yes, on both sides. If you made large deposits just before a strong rally, your money-weighted return may look great even if your strategy matched the index exactly. The reverse is also true. Only a time-weighted comparison tells you whether your strategy — not your timing — is outperforming.
Is there ever a reason to prefer money-weighted return over time-weighted?
Yes. If you want to know whether your specific investing behavior (timing of deposits, withdrawals, rebalancing decisions) added or destroyed real dollar wealth, MWR is the right metric. It is also more relevant in retirement when evaluating whether a withdrawal plan is sustainable under real market conditions.
How does WealthWise calculate my return for the S&P 500 comparison?
WealthWise applies Modified-Dietz across sub-periods defined by your actual transactions, then chains the results to produce a time-weighted return for your portfolio. This is compared against the S&P 500's own time-weighted return in CAD over your exact holding period — giving you a genuinely comparable benchmark.
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Educational content. Figures and rules verified against the official sources above; tax amounts change annually.