# How to Calculate TWR

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Investors are always looking for better ways to to achieve maximum return with minimal risk. Total Weighted Return is one method of calculating investment return. TWR measures investment performance over a given period of time. There are two approaches and three simple steps to calculating the ratio accurately. One approach looks at a calculation with withdrawals and contributions, and the other without.

Review the TWR formula. The standard formula for TWR is (Final balance - Initial balance) / (Initial balance) * 100, where the final balance is the price of the investment when it is sold and initial value is the value when sold.

Calculate TWR without withdrawals or contributions. For our example, let's say you invest \$10,000 in a mutual fund and then sell it one year later for \$12,000. The TWR is (\$12,000 - \$10,000) / \$10,000 = .2, or 20 percent. This is a basic return equation that looks at your profit and divides by the original cost of the purchase in order to get a percentage return.

Review TWR with withdrawals and contributions. Now let's assume that you withdraw \$2,000 from your account over one year and contribute \$5,000 more in shares of the mutual fund in the same year. The formula is [(Final balance - 0.5 Contributions + 0.5 Withdrawal) / (Initial balance + 0.5 Contribution - 0.5 Withdrawal) - 1 ]. With \$2,000 in withdrawals and \$5,000 in contributions, the equation is [(\$12,000 - 0.5 \$2,000 +0.5 \$5,000) / (\$10,000 - 0.5 \$2,000 +0.5 \$5,000)] = 1.17, or 17 percent. As expected, higher withdrawals decrease TWR and higher contributions increase TWR.

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