Investor education: how plan sponsors should report your returns

Abstract

Purpose

Most investors' retirement portfolios have inter‐period cash inflows. The standard time‐weighted mean return (or geometric mean return) is generally used to report returns on investors' retirement portfolios. The purpose of this paper is to examine the standard time‐weighted mean return and point out additional deficiencies in the time‐weighted mean in this situation, which have not been addressed in the literature.

Design/methodology/approach

The paper provides examples that point out additional deficiencies that arise using geometric mean returns as estimates of an individual investor's performance.

Findings

With inter‐period cash flows the dollar‐weighted return can be affected by both timing and the sequence of the asset return series even if the investor has constant inflows or outflows of capital. In contrast for these same asset return arrays, the time‐weighted mean return measure may be unaffected by these important variations in the return arrays, and thus may misrepresent actual investor results. This is an important point that has not been addressed in the literature.

Originality/value

With inter‐period cash flows the dollar‐weighted return can be affected by both timing and the sequence of the asset return series even if the investor has constant inflows or outflows of capital. In contrast for these same asset return arrays, the time‐weighted mean return measure may be unaffected by these important variations in the return arrays, and thus may misrepresent actual investor results. This is an important point that has not been addressed in the literature.

Citation

Johnston, K., Hatem, J. and Carnes, T.A. (2010), "Investor education: how plan sponsors should report your returns", Managerial Finance, Vol. 36 No. 4, pp. 354-363. https://doi.org/10.1108/03074351011027547