Time-weighted Versus Dollar-weighted Returns

There was an interesting comment in the latest Millionaire Interview at the ESI Blog:

"I find it a bit silly how most people focus on their time-weighted returns instead of their asset-weighted returns... Your financial freedom is affected by your asset weighted returns, not your time weighted returns."

I have thought about this before, but not exactly in these terms. This is an interesting way of putting this idea. 

The way I thought about it is: When you start investing you will probably make mistakes. But you will have less money and so they matter less. What matters more is what your returns are when you have a lot of money.  So, you can afford to pay some tuition fees. I really paid too much tuition...

This graph shows an index of my returns in Australian Dollar terms starting at 1000 in 1996:

Initially, I did well. But then the dot.com crash came and I started losing, ending up below where I started. Then I rode the next bull market. I started getting out as the financial crisis began to appear. But I got back in again too early and crashed. I wasn't quite back to square one, but not far from it. Not much happened in the next few years following the crisis and then things took off from 2012 on. These are my time-weighted returns.

In the last 10 years, my rate of return has been 11.1% vs. 12.0% for the ASX 200. In the last 20 years it was 4.8% vs. 10.6% for the ASX 200. Since "inception" the numbers are 6.2% and 11.2%. I got through the COVID-19 crash a lot better than the previous bear markets. Hopefully, that improvement will be maintained in the future.

The following graph shows relative out-performance compared to the ASX 200 over every time horizon:

The way to interpret this is: If you invested with me in 1996 then you would have under-performed the ASX 200 by 4-5% p.a. since then. However, if you invested with me in some months in 2012 you would have matched or just beaten the ASX 200 since then. Similarly, investing in the year before the COVID-19 crash you would now be ahead of the ASX. Investing with me in the year after the COVID-19 crash you would be behind the ASX and so forth.

This graph shows my absolute profits in Australian Dollars:

A simple way of showing dollar-weighted returns. Basically, things went nowhere till 2012. All the gains have happened since then. So, I "wasted" 15 years learning to invest while saving.