Returns · 4 of 6
TWR vs money-weighted return: what each one measures
TWR and money-weighted return are two legitimate ways to measure your portfolio's return, but they answer different questions. One judges your strategy; the other, what actually happened to your money. Knowing which to look at, and when, keeps you from drawing the wrong conclusion.
5 min read
In short
- The time-weighted return (TWR) measures the quality of your strategy, because it strips out the effect of when and how much money you add or withdraw.
- The money-weighted return (MWR), also called the internal rate of return (IRR), measures what your money actually gained or lost, taking the date of each contribution into account.
- To compare yourself with a fund or an index, use the TWR; to know how your money really did, look at the IRR.
- When the two figures diverge it is not an error: the gap shows whether you added money at good or bad moments.
What TWR measures
The time-weighted return (TWR) isolates the effect of your contributions and withdrawals. To do it, it splits the period into sub-periods every time money enters or leaves and chains each sub-period's return together. When and how much you deposited stops influencing the figure.
What remains is the pure performance of your investment decisions: how well your assets did, regardless of the timing of your cash moves. That is why TWR is the metric funds and indices use, and the only fair way to compare yourself against a benchmark: everyone is measured with the same yardstick, without contributions distorting the result.
What the money-weighted return (IRR) measures
The money-weighted return (MWR), also called the internal rate of return (IRR), goes the other way: it accounts for when you put each euro in. It is the rate that makes the value of your contributions and withdrawals equal the portfolio's current value, dates included.
So it measures your real outcome in euros, the one you actually feel in your pocket. If you added a lot of money right before a good stretch, your IRR rises; if you added it right before a bad one, it falls, even if your strategy was identical.
An example: you start with €1,000 and gain 10% in the first half of the year. Encouraged, you add €20,000, and in the second half the market drops 10%. Your TWR ends up almost flat (up then down by the same rate), but your IRR is clearly negative: most of your money only lived through the bad stretch.
How to know which to look at
Want to judge the strategy?
Look at the TWR. It tells you whether your investment choices were good, without rewarding or punishing you for when you contributed.
Want to compare with a fund or index?
Use the TWR too. It is the only metric that puts everyone on equal footing, because it ignores the timing of your cash moves.
Want to know how your money did?
Look at the IRR. It reflects your real outcome in euros, including the effect of contributing or withdrawing at good or bad moments.
The takeaway
Neither is "the right one": the TWR judges the strategy and lets you compare against funds and indices; the IRR measures what your money actually gained or lost, timing included. When the two diverge, that gap is not an error; it is telling you something useful about how you time your contributions.
MyPortfolio shows you both, so you know at once how good your strategy was and how your money truly did.
Frequently asked questions
What is the difference between TWR and MWR?
The TWR measures how your investments performed without your contributions and withdrawals affecting the figure; the MWR takes into account when you put in each euro and measures your real result in money. The first judges the strategy; the second, what happened to your money.
Is the money-weighted return the same as the IRR?
Yes. The money-weighted return (MWR) is the internal rate of return (IRR) of your cash flows: the rate that makes your contributions and withdrawals equal the portfolio's current value, dates included.
Which is better, TWR or MWR?
Neither is better: they answer different questions. Use the TWR to judge your strategy and compare yourself with a fund or an index, and the IRR to know how much your money gained or lost.
Why are my portfolio's IRR and TWR different?
Because the IRR gives more weight to the periods when you had more money invested. If you added money just before a fall, your IRR ends up below the TWR; if you added it before a good run, above it.