Most people invest with a purpose — to fund retirement, buy a home, grow wealth, or protect capital. That goal shapes your return target, risk appetite, and timeframe. A portfolio only succeeds if it delivers the right outcome, at the right risk, within the right time.
Performance measurement tests that alignment. Are you on track? Is your risk being rewarded? A clear return figure answers those questions — offering the feedback needed to stay on course.
The money-weighted rate of return (MWRR), or internal rate of return (IRR), captures your personal performance. It reflects every deposit, withdrawal, and when they occurred — showing how effectively your capital was put to work.
•
Captures real investor experience:
Reflects the impact of timing and size of every contribution or withdrawal.
•
Ideal for non-linear cashflows:
Suits pensions, ISAs, and property — where money moves in and out irregularly.
•
Links behaviour to outcome:
Highlights how investment decisions — not just markets — drive returns.
Can’t compare directly across investors with different contribution patterns.
Early inflows or late withdrawals can heavily skew results.
Unlike TWRR, MWRR reflects behaviour — so it can’t always be compared to index returns.
1. Why performance matters
Most people invest with a purpose in mind — to fund retirement, buy a home, build long-term wealth, or preserve capital over time.
That purpose defines your target return, acceptable level of risk, and investment horizon.
A portfolio is only successful if it delivers the right outcomes for your goals, at the right level of risk, within the right timeframe.
Measuring investment performance is what lets you judge that alignment. It allows you to ask: Are we on track? Are we taking too much or too little risk?
A reliable return figure helps you assess whether your strategy is working, whether your risk is being rewarded, and whether you're progressing toward your objective — or falling short.
An unreliable figure tells you almost nothing.
Performance metrics act as a
feedback mechanism
A process through which investors update beliefs, adjust strategy, and adapt behaviour based on outcomes — similar to Bayesian learning or reinforcement loops in behavioural finance.
— informing how you adjust your asset allocation, rebalance your portfolio, or refine your approach over time.
In behavioural terms, return figures shape perception and emotion, anchoring confidence, influencing commitment, and guiding future decisions.
But this feedback is only as useful as the signal it provides. Misstated or misunderstood returns can distort judgement, leading to false confidence, missed warnings, or poor decisions.
These distortions can
reinforce poor habits
Barberis & Thaler (2003) — In their behavioural finance survey, they show that investor behaviour is shaped by perceived feedback. When return signals are weak or misleading, they can entrench suboptimal habits and miscalibrated confidence.
,
encouraging unhelpful behaviours — like doubling down on underperformance, chasing short-term winners, abandoning a sound plan too early, or underestimating the risks needed to meet a goal.
When performance is miscalcualted, it doesn't just obscure the truth, it nudges investors off course.
2. What factors to include in the calculation
Investment returns may appear as a single figure — and seem
simple to calculate
It's just: [(Pricet+1 ÷ Pricet) – 1] × 100, right?
—
but every return is the output of a series of underlying choices.
What are we really trying to measure? That depends on the lens you apply.
Are we evaluating a fund manager's skill? Tracking the performance of an index? Or assessing your personal progress toward a financial goal?
Each objective calls for a different view of return — and each raises different questions:
Are we measuring the total gain or the rate of growth? Should we include income, cash flows, or just price movements?
Do we adjust for risk? For fees? Against what benchmark — and over what time horizon?
These decisions shape the structure, interpretation, and relevance of any return figure.
As the CFA Institute notes in its Global Investment Performance Standards (GIPS), a valid total return must reflect capital appreciation, income, and the impact of cash flows.
But how those elements are handled — and what they're intended to illuminate — varies by context.
The table below outlines the building blocks of return — each capturing a different aspect of investment experience.
Their inclusion (or omission) alters not just the number reported, but the story it tells.
| Component |
What it reflects |
| Capital gains |
The change in the asset's value from purchase to sale. The most visible form of return, reflecting price appreciation or depreciation. |
| Income |
Dividends, interest, or rent received during the holding period. Income reinforces perceived control and is key in yield-focused strategies. |
| Time |
The duration of investment and the timing of gains or losses. Time affects annualisation, compounding, and psychological framing. |
| Cash flow behaviour |
Contributions, withdrawals, and rebalancing. These investor actions shape personal outcomes and must be included to reflect individual experience. |
| Risk exposure |
The nature and level of risk undertaken. Without it, return figures are difficult to evaluate meaningfully — risk contextualises performance. |
| Costs and friction |
Fees, taxes, and transaction costs. These diminish real returns and are essential in assessing net performance. |
Each of these elements has a psychological analogue: capital gains anchor confidence; income reinforces the illusion of control; risk shapes regret; timing fuels hindsight bias.
So what you choose to include isn't just a technical decision — it colours the emotional response.
Once you've clarified your objective, it's easy to know what to include; the next step is how to reflect it.
For example: if you want to measure personal investor experience, you must account for cash flows — this points toward
money-weighted return (MWRR).
If you want to isolate the investment's performance irrespective of timing, you'd use
time-weighted return (TWRR).
But those answers come later — for now, the focus is on understanding what factors shape the picture you're trying to paint.
3. Different ways to calculate returns
There are several established ways to measure investment performance, and each one offers a distinct lens.
The method you choose determines whether you are reading the investor's lived experience, isolating the result of an investment strategy, or summarising growth over a period.
Aligning the method with the decision at hand leads to clearer interpretation and more consistent choices.
Also known as the internal rate of return (IRR), the money-weighted return reflects the unique path taken by an individual investor.
It accounts for both the magnitude
The size of each deposit or withdrawal relative to total invested capital.
and the
timing
The moment each cash flow occurs, which determines its influence on the final result.
of every contribution and withdrawal — producing a personalised measure of how effectively capital was deployed.
MWRR is particularly suited to portfolios where cash flows vary over time — such as ISAs, pensions, property holdings, or private equity.
Rather than isolating investment performance in the abstract, it captures the interplay between market returns and investor behaviour.
The method naturally incorporates the impact of real-world decisions:
poor timing
Entering markets at their peak or exiting during downturns can weigh heavily on long-term outcomes.
,
overtrading
Excessive switching or performance chasing often erodes gains and adds risk.
, and
pound-cost averaging
Investing steadily over time can help smooth volatility and reduce emotional reactivity.
all leave their imprint on the result.
In that sense, MWRR offers not just a number — but a reflection of the investor's lived experience.
Two individuals may invest in the same fund, yet achieve markedly different MWRRs if their actions diverge.
One who contributes steadily and stays the course may fare far better than another who exits during periods of turbulence.
This sensitivity to behaviour is what makes MWRR such a powerful lens for evaluating real outcomes — not just theoretical returns.
For a detailed breakdown, see our
full guide to MWRR.
The time-weighted return focuses solely on the performance of the investment itself — regardless of when cash is added or withdrawn.
By dividing the investment period into sub-intervals between each external cash flow, and linking the results geometrically, TWRR removes the influence of investor timing altogether.
This makes it the preferred standard for assessing fund managers and investment strategies.
It attributes gains and losses to the underlying portfolio composition and market dynamics — not to the behaviour of the individual investor.
TWRR is particularly useful when you want to evaluate performance in a neutral, apples-to-apples manner.
It allows for fair comparisons across portfolios with different cash flow patterns, enabling investors, analysts, and consultants to focus on how well the assets themselves were managed.
While MWRR answers the question, “How did I do with this investment?”, TWRR asks, “How did the investment perform on its own terms?”
It's an essential tool for distinguishing portfolio design from investor behaviour — but it can overlook the lived experience of investing, where timing and emotion often shape real outcomes.
For a full breakdown of how it works and when to use it, see our
dedicated TWRR guide.
The compound annual growth rate is a simplified way to express average performance over time.
It answers the question: if your investment had grown at a steady, compounding rate each year, what rate would produce the same final value?
By smoothing all fluctuations into a single annualised figure, CAGR offers a clean summary of growth — but one that glosses over the path taken.
It assumes a single, lump-sum investment held from start to finish, with no additions, withdrawals, or volatility along the way.
That makes it unsuitable for most real-world portfolios — but useful for back-of-the-envelope comparisons, long-term trend illustrations, or headline figures in marketing materials.
CAGR is silent on the experience of investing.
It doesn't reflect risk, timing, or behaviour — only the mathematical end result.
As such, it can be misleading if used without context.
Two portfolios with identical CAGRs might have wildly different drawdowns, volatility, or investor outcomes.
It tells you what happened in aggregate, but nothing about how or why.
For a deeper dive, see our
CAGR guide.
The result can shift meaningfully depending on what is included, when it occurs, and how it is weighted.
Every return measure rests on assumptions — about scope, relevance, and how precisely we want to model reality to guide thoughtful decisions.
| Return method |
Analytical focus |
Accounts for cash flows |
Most appropriate when |
| Money-weighted return (MWRR) |
Individual portfolio performance |
✓ |
Evaluating personal portfolios, private equity, or any strategy involving contributions and withdrawals |
| Time-weighted return (TWRR) |
Investment performance |
✗ |
Comparing fund managers or benchmarking strategies independently of investor behaviour |
| Compound annual growth rate (CAGR) |
Smoothed growth rate |
✗ |
Illustrating long-term trends or headline returns assuming no cash flow interruptions |
4. Choosing the right return method: MWRR
Markets move independently of your decsions, but you control how and when you invest
Including the size and timing of deposits, rebalancing decisions, lump sums, and withdrawals.
. These decisions produce a distinct pattern of cash flows — and because returns aren't linear, when you act can significantly affect your results.
As discussed above, MWRR captures both the size and timing of your cash flows, making it the most appropriate way to assess your personal investment performance.
Use MWRR when your investment experience reflects active choices — not just passive exposure to an asset or portfolio.
-
✓
Individual performance: You want to measure your personal return based on how you managed your investment over time
-
✓
Cash flow sensitivity: Your result depends on when and how much you invested or withdrew — not just what the asset returned overall
-
✓
Comparing behaviours: You're analysing outcomes across people or accounts with different investment timelines or decisions
5. Why cashflows matter
Investment returns are not experienced in a vacuum. The pattern of money flowing in and out of your portfolio — and the timing of those movements — has an influence on your outcome.
To understand your true return, you must consider not just what you invested in, but when and how you did it.
Imagine a fund with a reported return of 10% over the year. That figure assumes a lump sum invested on day one and held throughout.
But most investors don't behave that way. They buy in stages, top up during rallies, or withdraw after losses.
As a result, their personal return can be much lower — or occasionally higher — than the headline number.
This mismatch between what the investment earned and what the investor received is known as the
behaviour gap
The gap between reported investment performance and the return an investor personally experienced, often due to poor timing decisions.
.
It's a consistent pattern observed across decades of research.
Multiple
studies
• DALBAR QAIB 2023: Investor returns lag fund returns due to timing missteps
• Morningstar Mind the Gap: Consistent 1 to 2% gap due to behavioural drag
• Vanguard research: Quantifies investor underperformance linked to reactive behaviour
show that investors typically underperform their own holdings by 1 to 2% per year.
That shortfall compounds over time — and is largely driven by poor cash flow timing.
Two people can invest in the same fund and walk away with very different results. The reason isn't the fund — it's their behaviour. One investor might contribute regularly and hold their position, while another might react emotionally, chasing highs or selling during downturns. What separates their outcomes is the pattern of cash flows in and out.
The timing of when you buy or sell determines how much of a market move you capture. The amount you invest at each point influences your exposure. Behavioural tendencies — like panic selling or return-chasing — can compound into long-term underperformance. And consistency plays a role too: a disciplined strategy tends to outperform reactive trading over time.
6. The money-weighted return (MWRR) formula
Technically, MWRR is the internal rate of return (IRR) that sets the net present value of all cash flows — including your final portfolio value — to zero.
But don't let that intimidate you, it is simply the return that makes your full investment journey “balance out”.
Formula: MWRR is the rate of return r that solves the following equation. It ensures that every contribution, withdrawal, and the final value — all adjusted for time — sum to zero:
Where:
CFt = Each cash flow at time t (including investments, withdrawals, and the final value)
t = Time since the start of the measurement period (in years or months)
r = Money-weighted rate of return (MWRR), i.e. the internal rate that balances the equation
In practice, this equation is solved using spreadsheet tools or financial software. But the idea is straightforward: MWRR tells you the single return that links your actual cash flows to your final outcome — adjusting for when each one occurred.
7. How to calculate MWRR
Calculating your
money-weighted rate of return (MWRR)
means finding the single return that balances all your personal cash flows — deposits, withdrawals, and final value — across time.
Mathematically, it's the rate that makes the net present value of all your cash flows zero.
This return is also known as the internal rate of return (IRR). It can't be solved algebraically — only numerically — using a spreadsheet, calculator, or software.
Use the following sign convention to structure your inputs correctly. Getting this wrong will distort the result — and could make your return look far better or worse than it actually is:
- Initial investment: Negative, e.g. –£10,000
- Additional contributions: Negative — new contributions are money going in
- Withdrawals: Positive — you're taking money out
- Final portfolio value: Positive — treated as a final withdrawal
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Log transactions:
Write down each amount and date for every deposit, withdrawal, and your ending value
-
Assign time:
Record the exact date or use a consistent time index (e.g. year fractions or months)
-
Solve numerically:
Use a financial calculator or iterative method to find the rate that zeroes out the net present value
In Excel or Google Sheets, you can calculate MWRR using the XIRR function:
-
Enter all cash flows in one column:
Include your initial investment, any deposits or withdrawals, and the final value
-
Enter the corresponding dates:
Add the transaction date for each amount in the next column
-
Use the formula:
Type
=XIRR(cashflows, dates) to calculate your annualised return
XIRR adjusts for irregular time intervals. Use =IRR only if your flows occur at regular intervals (e.g. monthly)
Make sure your signs are correct
Prefer a faster route? Use our
interactive MWRR calculator to input your dates and cash flows — and we'll handle the maths for you
8. MWRR in action: worked example
Let's compare two investors in the same fund. The fund itself delivers a steady 7% return each year — but their money-weighted returns (MWRRs) tell a very different story, all because of when they added or withdrew money.
| Year |
Fund return |
Low |
High |
Investor A |
Investor B |
| 1 |
7.0% |
£100 |
£110 |
Invests £10,000 |
Invests £5,000 |
| 2 |
7.0% |
£97 |
£120 |
– |
Invests £15,000 |
| 3 |
7.0% |
£112 |
£130 |
Adds £10,000 |
– |
| 4 |
7.0% |
£98 |
£140 |
– |
Withdraws £5,000 |
| 5 |
7.0% |
£125 |
£150 |
Withdraws all |
Withdraws all |
| MWRR |
7.0% |
– |
– |
8.3% ↑ |
4.9% ↓ |
Both investors selected the same fund and held it for five years — yet their results diverged sharply. The difference wasn't the fund itself, but how and when they interacted with it.
The fund reported a consistent 7% annual return — but that's an average, not a smooth path. In practice, its price fluctuated between £100 and £150. These swings didn't affect the benchmark return, but they did shape each investor's personal outcome.
Investor A: - Invested early, typically at lower price points, and stayed fully invested throughout. By avoiding withdrawals during market dips and giving compounding time to work, they captured more upside. Their return ended up higher than the fund's published figure.
Performance return:
8.3%
Investor B: - Starts with a lower investment amount, adding more later, often near annual highs, and made a partial withdrawal during a price dip. Even though the fund grew steadily over five years, poor entry and exit points led to a drag on performance — and a significantly lower personal return.
Performance return:
4.9%
Investor A achieved an MWRR of 8.3%, while Investor B earned 4.9%. That's a gap of 3.4 percentage points — despite investing in the same fund over the same five-year period.
The difference came down to timing. A invested near market lows and stayed the course. B entered near peaks and withdrew during a decline. MWRR isolates these effects — showing how entry and exit points shape real-world performance.
9. MWRR: strengths and limitations
The money-weighted rate of return (MWRR) is powerful because it reflects your actual experience as an investor — not just what the fund earned, but what you earned.
It connects performance directly to your personal timing and behaviour. But like any measure, it has strengths and trade-offs:
For broader evaluation, many professionals also look at complementary metrics such as
time-weighted return (to isolate manager skill),
Sharpe ratio (to adjust for volatility), or
IRR (used in private equity and multi-stage cashflows).
Strengths
- ✓ Reflects real investor experience — it accounts for timing of all contributions and withdrawals.
- ✓ Easy to understand: the result is a personal rate of return, just like a bank account or savings product.
- ✓ Excellent for goal-based planning — shows whether your money actually grew as intended.
- ✓ Useful in behavioural analysis — helps identify the impact of investor decisions on outcomes.
- ✓ Makes sense in real-world terms — especially for lump sums, DCA strategies, or irregular cashflows.
Limitations
- ✗ Heavily influenced by timing — a single poorly timed trade can distort the result.
- ✗ Not suitable for comparing fund managers — doesn't separate manager skill from investor behaviour.
- ✗ Different investors in the same fund can have wildly different MWRRs — making benchmarking harder.
- ✗ Not scale-invariant — results vary based on size and timing of contributions.
- ✗ Can be gamed in marketing by selectively including/excluding certain flows or timeframes.
- ✗ Less widely used in professional performance reports than TWRR or IRR.
10. Interactive calculator
Use this tool to calculate your money-weighted rate of return (MWRR) — a measure of how your actual investment behaviour influenced your portfolio's performance over time.
Select how many cash flow periods you want to include. Then enter the date and amount of each investment or withdrawal. Don't forget to enter the final portfolio value as your last row.