I still don’t understand, and I won’t bother the forum community with this. In the end, I greatly simplified my dashboard by keeping only the TRI, which makes sense to me.
Thank you to all contributors.
Here’s a detailed yet simple example @dregnier
TWR calculation
Basically, the concept of TWR resembles calculating the performance of a stock (or fund / portfolio) based on the market-price of a single share.
(i.e. it ignores the total volume of “assets under management” of the fund/portfolio, but highlights the mix of its components)
As highlighted here,
The slight differences … in the beginning is caused by the fees of the purchase and the slightly different buying price [used for the share] regarding the close price of the day [used for the benchmark].
If calculated on day-basis over a reporting period of months or years, such “slight differences” should be negligible.
The most significant divergence occurs when a dividend is paid on December 15, 2022. The performance of the actual Share-1 position benefits from this additional outbound transfer, resulting in a significant increase in the daily performance of around 9%.
If the dividend payout is modeled to happen “overnight”, i.e. reduces the share value at start of the period, this will push that period’s performance. (implementation details here: adding the dividend outflow to the subsequent MVE, basically makes it an “overnight” outflow)
If the same payout was modeled to happen during that same period, it would decrease the period’s performance. Which would distort the goal of analysis in TWR.
At the moment I’m not fully clear what “cumulative , true TWR” means in PP as opposed to TWR as linked above.
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concerning “cumulative”: as to my understanding by the TWR concept it is meant to be a single measure for a compound portfolio across several periods. i.e. the measure is compound / cumulative by nature.
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concerning “True”: it’s meant to say that PP’s day-based calculation avoids approximation margins found in month- or quarter-based calculations. (see here)
Bonjour @chrism,
Merci pour cette contribution et merci pour votre incitation à m’inviter à comprendre le TTWROR cumulé mais je vais rester sur ma position consistant à nettement préférer le TRI.
Je note que sur le site Investopedia, deux passages qui me confortent dans ma position :
1° «Bien qu’il soit largement utilisé, le TWR ne reflète pas le rendement réel pondéré en dollars d’un investisseur et peut ne pas être idéal pour les portefeuilles personnels avec des flux de trésorerie fréquents. »
Je pense que cela correspond à ma situation.
2° « Néanmoins, les utilisateurs doivent se méfier des limites de TWR. Cette mesure ne reflète pas le rendement réel en dollars enregistré via le portefeuille. Pour cela, le rendement pondéré en fonction de l’argent est une meilleure solution. «
Je suis en accord avec ce propos et je pense que le TRI est une meilleure solution.
Par ailleurs, j’ai reçu une notification du forum me faisant part d’un échange que vous avez avec @Magellan et qui renvoie au fil que j’avais initié. A la lecture de vos échanges, je constate qu’il a encore beaucoup d’interrogations sur la bonne compréhension de ce TTWROR.
Bien amicalement.
dregnier
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Hello @chrism,
Thank you for your contribution and for encouraging me to understand cumulative TTWROR, but I will stick to my position of clearly preferring IRR.
I note that on the Investopedia website, there are two passages that reinforce my position:
1. "Although widely used, TWR does not reflect an investor’s actual dollar-weighted return and may not be ideal for personal portfolios with frequent cash flows. "
I think this applies to my situation.
2° ‘Nevertheless, users should be wary of the limitations of TWR. This measure does not reflect the actual dollar return recorded through the portfolio. For this, the money-weighted return is a better solution.’
I agree with this statement and I think IRR is a better solution.
In addition, I received a notification from the forum informing me of an exchange you had with @Magellan, which refers to the thread I started. Reading your exchanges, I see that there are still many questions about the correct understanding of TTWROR.
Best regards.
dregnier
Translated with DeepL.com (free version)
I see.
As fellow learner, I simply offer my current understanding of how the TWR measure works.
TWR and IRR, both measures are like a Flathead and a Phillips screwdriver, different tools to a common purpose. Anyone is free to decide to put both, or only one of them in their toolbox. In the best case, this choice corresponds to the type of screws found in their home 