Money-Weighted vs Time-Weighted Returns

TWR measures what the investment vehicle earned, independent of when investors chose to put money in. It eliminates the distortion caused by the investor's own deposit and withdrawal timing. A fund manager is typically evaluated on TWR, because they cannot control when their investors buy and sell.

TWR links the returns of sub-periods together geometrically. A portfolio that gains 20% in year one and loses 10% in year two has a TWR of (1.20 × 0.90) − 1 = 8%, regardless of the account balance at each point.

MWR — which XIRR computes — measures what you, the investor, actually earned given your specific timing. It weights each period by the amount of capital at work during that period.

Large deposits just before a downturn will lower your MWR relative to the fund's TWR. Large deposits just before a rally will raise it above TWR. MWR reflects your decisions, not just the asset's performance in isolation.

Most brokerage performance dashboards display time-weighted or modified Dietz returns. This lets them compare their fund managers fairly and avoids appearing to blame the fund when an investor happened to deposit a large sum at an unfortunate time.

The problem for individual investors: you don't care how the fund performed in the abstract. You care how your specific dollars performed, given when you actually invested them.

A fund returns +50% in year one and −30% in year two. TWR: (1.50 × 0.70) − 1 = 5%.

Now suppose you invested $1,000 at the start and added $50,000 after year one (at the peak, excited by the rally). MWR: approximately −25%, because most of your capital arrived just before the 30% drop. Same fund. Same periods. Opposite conclusion about whether you came out ahead.

Use TWR to evaluate your fund manager or compare funds — it is a fair measure of investment skill that strips out investor timing decisions. It answers: did this fund earn its return?

Use MWR (XIRR) to understand what your money actually earned — it includes your behavioral decisions and is the true measure of your financial outcome. It answers: did I benefit from this investment? For any personal performance review, XIRR is the right tool.