When is it appropriate to calculate a time-weighted rate of return?

Calculating a time-weighted rate of return (TWRR) is appropriate when there have been additional investments or withdrawals in the investment portfolio. The main purpose of the TWRR is to negate the impact of cash flows on the investment performance calculation, providing a clearer picture of the investment manager’s performance over time.

This methodology avoids the distortions that can arise from cash inflows or outflows, ensuring that the return reflects only the performance of the investments themselves. The TWRR calculates the geometric mean of the returns achieved in each sub-period, where each sub-period is defined between cash flows. This allows investors to assess the manager's ability to generate returns without the influence of the timing and magnitude of cash flows.

In contrast, calculating returns under circumstances of steady or stable market conditions may influence how returns should be viewed, but they do not necessitate the use of TWRR. Similarly, high-risk investments or the market's volatility do not specifically dictate the need for a time-weighted return calculation; instead, the focus should remain on the presence of cash flows that could impact the performance figures.