# What the heck is Modified Dietz method

It’s a way to calculate performance for a given period given cash flows and timing. Simple example (to mull on):

Start on Jan 1 with \$1 million fund that goes up 10% in the month. End at \$1.1mm or +10% for the month.

OR

Start on Jan 1 with the same \$1mm fund that again goes up 10% in the month, but 5 days before month end, you also invest \$100 million in a fund B that stays flat. You end the month with \$110.1mm but you know that you didn’t actually ‘earn’ \$100mm, that was just a big cash flow. You also really care about WHEN the cash flow happened, esp. if it had any performance to speak of.

So, the intuition is to both take into account the SIZE and the TIMING of the cash flows when calculating performance. For timing, in this case you get 5 of 31 days of performance, so ~16% weighting. Can’t remember the full formula off-hand, but you can just look that up somewhere. What matters, though, is for you to remember the intuition behind what’s going on.

Here’s the analogy I always use:

You’re moving your apartment and your big, strong friend shows up early and moves a ton of boxes all day. In the middle of the day, your small, weak friend shows up and moves just a couple of boxes. You care about both the length of time (all day or just part) as well as how much of an impact (a lot or just a few boxes). Combine them together, and you have your full performance.