dollar-weighted return
Dollar Weighted Return measures the actual return an investor earned, giving more weight to periods when more money was in the account.
In plain English
Remember the day the light went out in the middle of a football match, and everyone in the compound started arguing about whose generator gets to run first because the fuel is not enough for all the plugs. What matters most is more than when the light came back, but how much of it you actually enjoyed while your fridge was plugged in and your neighbour's freezer was not. Dollar weighted return works the same way. It cares about how much money was actually sitting in your investment when the good days or bad days happened, more than what the market did on average.
Say you invest ₦200,000 in a mutual fund in January when the market is calm, then in June, right before a lovely rally, you add another ₦800,000 from a bonus. Most of your money caught the good days. Your dollar weighted return will look much better than someone who put in ₦800,000 in January and only added ₦200,000 in June, even if both of you technically invested in the same fund over the same year.
This is different from the simple average return the fund manager might show you in a shiny brochure, which treats every period the same whether you had ₦10,000 or ₦10,000,000 in in the account. Dollar weighted return is personal. It is your story, your timing, your cash flows, not the fund's.
A Nigerian professional in Manchester sending money home in instalments to a family investment club will find this useful. If she sent the bulk of her contributions right before a strong quarter, her personal return will beat someone who dripped money in steadily throughout a flat year, even though they are both in the same investment.
It is a humble number, really. It does not ask what the market did. It asks what happened to you, based on when your money showed up.
You invest ₦300,000 in January and add ₦700,000 in October. The fund grows nicely in November and December. Because most of your ₦1,000,000 arrived just before the growth, your dollar weighted return for the year comes out higher than the fund's own average yearly return, since your money was well positioned when the growth happened.
Questions people ask
How is dollar weighted return different from time weighted return?
Time weighted return ignores when you added or withdrew money and just measures the investment's own performance period by period. Dollar weighted return factors in your actual cash flows, so it reflects your personal timing luck or misfortune, more than the fund's skill.
Why would my dollar weighted return differ from what my fund manager reports?
Fund managers usually report time weighted return because it shows their skill fairly, regardless of when clients added or removed money. Your dollar weighted return depends on your own deposits and withdrawals, so two people in the same fund can have very different personal results.
Can a good dollar weighted return still mean I made a bad investment choice?
Yes, sometimes it simply means your timing was lucky, perhaps you added money right before a rally by chance rather than by skill. It measures outcome, not necessarily wisdom, so use it alongside other numbers before celebrating too hard.
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