The Money-Weighted Return (MWR), also famously known as the Internal Rate of Return (IRR), is a method of calculating an investment’s performance that accounts for the timing and size of cash flows. Think of it as your personal investment report card. It doesn’t just tell you how your stocks or funds performed on their own; it tells you how you performed as an investor, factoring in your decisions to add or withdraw money along the way. If you add a large sum of cash right before the market soars, your MWR gets a handsome boost. Conversely, if you pull money out just before a rally, your MWR will reflect that poor timing. It’s the ultimate measure of your real-world return, blending the performance of your assets with the skill (or luck) of your own capital allocation decisions.
Imagine you're a gardener. The performance of your seeds—how they grow given the sun and rain—is like the Time-Weighted Return (TWR). It’s a pure measure of the asset's potential. The MWR, however, is the story of your gardening season. It includes not only how the seeds grew but also your critical decisions:
MWR is your personal performance diary. It doesn’t let you off the hook by blaming the market; it directly reflects the consequences of your actions.
Choosing between MWR and TWR depends entirely on what you want to measure: your own skill or your fund manager's skill. They answer two very different questions.
Use MWR to answer the question: “How did I do?” MWR is the perfect tool for an individual investor managing their own portfolio. Since you control when and how much money goes in or out, MWR gives you the most accurate picture of your portfolio's actual, personalized growth. It is the true measure of the change in your wealth resulting from your investment choices.
Use TWR to answer the question: “How did my fund manager do?” The investment industry uses Time-Weighted Return (TWR) as the standard for comparing professional money managers and mutual funds. Why? Because a fund manager can’t control when investors decide to pour money in or pull it out. It would be unfair to penalize a manager’s track record just because her investors happened to make large withdrawals right before her best stock picks took off. TWR strips out the distorting effects of these cash flows, isolating the manager's investment selection skill.
You don't need a PhD in mathematics to grasp the MWR concept. At its core, the MWR is the single discount rate that makes the present value of all your cash inflows (your initial investment and any later deposits) equal to the present value of all your cash outflows (your withdrawals and the final value of your portfolio). In simpler terms, it finds the constant interest rate that would explain your portfolio’s final value, given all the money you put in and took out along the journey. Thankfully, you don't have to calculate this by hand. Spreadsheet programs have done the heavy lifting for you. In Microsoft Excel or Google Sheets, the `XIRR` function is your best friend. You simply plug in your cash flows and their corresponding dates, and it magically calculates your personalized Money-Weighted Return.
For followers of value investing, MWR is more than just a performance metric; it's a powerful feedback loop for discipline and behavior. The philosophy preaches buying wonderful companies at fair prices, which often means being “greedy when others are fearful.” A value investor who successfully adds capital during market panics (when great assets go on sale) should see their MWR outpace their TWR over the long run. This indicates superior timing and capital allocation skill. A low MWR, on the other hand, could be a red flag, signaling a tendency to chase performance by buying high or to panic and sell low. By tracking your MWR, you get an honest assessment of not just what you buy, but when you put your hard-earned capital to work.