Curriculum·S211 Portfolio Analytics and Performance Measurement·about 40 min
Measuring return correctly
By the end of this lesson you can
- →Compute a time-weighted return and a money-weighted return from the same account history
- →State which question each measure answers, and why you need both
- →Explain why the number your venue displays is neither of them
- →Identify the cash flow records that make the calculation possible at all
Sophomore · enrolled learners
This lesson opens with The gap that could not be measured at market scale.
- What happened
- Dichev published in the American Economic Review in 2007, arguing that investor returns and security returns differ because of the timing and magnitude of investor capital flows, and reporting that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets. The gap was put at about 1.3 percentage points a year for NYSE and AMEX over 1926 to 2002 and about 1.5 points internationally. Keswani and Stolin re-examined the evidence in Finance Research Letters in 2008 and found the NYSE and AMEX gap was negative across the last two thirds of that period, that the international results moved with database coverage changes, and that the UK figure reversed from 1.1 to negative 1.3 depending on the data source. Their stated conclusion was that the findings are not robust.
- The decision point
- Read what the dispute is actually about. Neither side disagrees that the two measures differ, or about how to compute them. They disagree about reconstructing an entire market's aggregate cash flows from incomplete historical data. You have no such problem. Your deposit and withdrawal dates are known exactly, so the calculation that a discipline cannot settle at market scale is arithmetic at yours, and almost nobody performs it.
What you will be able to answer
- →What does a time-weighted return measure?
- →What does a money-weighted return measure?
- →Why can the two diverge so sharply?
- →What does your venue's displayed number actually show?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.aeaweb.org/articles?id=10.1257%2Faer.97.1.386
- https://ideas.repec.org/a/eee/finlet/v5y2008i4p228-235.html
- https://www.dalbar.com/PressReleases/doc/2025QAIBPressRelease.pdf
- https://www.dalbar.com/PressReleases/doc/2026QAIBReportPressRelease.pdf
- https://blog.dalbar.com/qaib-glossary
- https://www.kitces.com/blog/does-the-dalbar-study-grossly-overstate-the-behavior-gap-guest-post/
- https://rpc.cfainstitute.org/research/financial-analysts-journal/2026/bad-timing-does-not-cost-investors-funds-returns
- https://www.spglobal.com/spdji/en/research-insights/spiva/
Confidence high·Volatility low·Reviewed 2026-08-06·Owner unassigned
Contested
The magnitude of the investor return gap at whole-market scale is genuinely contested, and this lesson presents both sides rather than picking one. What is not contested is the definition of either measure or the arithmetic of computing them for a single account, which is all this course requires.
F108-04 owns the six record fields as a tax and record-keeping topic. This lesson uses those records as the input to a return calculation. Keep the split.
The 1.3 and 1.5 point figures are as Keswani and Stolin's abstract states Dichev's finding; Dichev's own abstract says only that investor returns are systematically lower than buy-and-hold returns. That the market-scale gap is not robust is Keswani and Stolin's conclusion.
DALBAR's figures are single calendar years against the S&P 500, not against the funds investors held: 848 basis points in 2024 (16.54 against 25.02 percent, its 2025 press release) and 72 basis points in 2025 (17.16 against 17.88 percent, its 2026 release, the smallest since 2012). Harry Sit argues the method mixes behavior with the sequence of returns. Fulkerson, Jordan, Riley and Yan (Financial Analysts Journal, 2026), using Morningstar's own sample, estimate that poor timing costs fund investors about 0.10 percent a year against Morningstar's reported 1.2 percent shortfall. Present all of these as estimates in dispute.