Money-weighted return: how IRR captures the timing of contributions and withdrawals

Time-weighted return tells the investor how the portfolio strategy performed; money-weighted return tells the investor how they performed. The two can differ by several percentage points per year over the same period if the timing of contributions and withdrawals was particularly favourable or unfavourable.

What money-weighted return is

Money-weighted return (MWR) is the internal rate of return (IRR) on the actual cash flows in and out of a portfolio. It accounts for both the size and the timing of contributions and withdrawals: a contribution made just before a rally counts more in the calculation than a contribution made just before a drawdown, because the larger capital base captured the rally and a smaller base would have captured less.

The figure is investor-specific. Two investors using the same strategy with different contribution patterns will have different MWRs, even though the strategy's time-weighted return is identical for both. MWR therefore answers a different question than TWR: what was the realised compounded return on the actual money the investor put to work, given when they put it to work?

How it is computed

MWR is the discount rate r that satisfies NPV = 0 across the full sequence of cash flows: Σ Cᵢ / (1 + r)^tᵢ = 0, where Cᵢ are the cash flows (negative for contributions, positive for withdrawals or terminal value) and tᵢ are the times at which they occur. The equation is solved iteratively because there is no closed-form solution in general.

For a simple example: an investor contributes USD 10,000 at time 0, contributes another USD 5,000 at time 1, and the portfolio is worth USD 17,000 at time 2. The MWR is the rate that satisfies −10,000 − 5,000/(1+r) + 17,000/(1+r)² = 0, which solves to approximately 7.0% per year. The same strategy with a different contribution pattern would produce a different MWR.

For frequent flows, the Modified Dietz method provides an approximation that is computationally simpler than full IRR iteration and is exact when sub-period returns are constant. For most retail portfolios with monthly or quarterly contributions, Modified Dietz is sufficiently accurate.

What the evidence shows

The gap between TWR and MWR is most visible in periods where return patterns and cash flow patterns are correlated. An investor who systematically contributed during 2008–2009 (when many investors were selling) would have an MWR meaningfully above the strategy's TWR, because the contributions captured the subsequent recovery. An investor who panicked out in early 2009 would have an MWR meaningfully below the same strategy's TWR.

Studies of dollar-cost-averaging investors typically find MWRs that lag TWR over long horizons. The DCA pattern means contributions are spread evenly over time, which is neither systematically lucky nor systematically unlucky—but the corresponding MWR is still typically lower than TWR because the early contributions had more time to compound at the strategy's TWR than the later ones did. This is not a flaw of DCA; it is an arithmetic feature of how MWR weights cash flows by their dollar-time-at-work.

Morningstar's annual 'Mind the Gap' studies, which compare investor returns (MWR) to fund returns (TWR) across the US fund universe, consistently find investor returns trailing fund returns by 1.0–1.7 percentage points per year. The gap is the empirical measure of the cost of investor timing decisions across the population.

Limitations and trade-offs

MWR is investor-specific and not directly comparable across investors. Two investors using the same strategy with different cash flow patterns will produce different MWRs, and the difference reflects their cash flow timing rather than the strategy's properties. For comparing strategies, TWR is the appropriate number.

MWR is also sensitive to outliers in cash flow timing. A single very large contribution made at an unusual point can dominate the IRR calculation and produce a figure that does not reflect the typical experience over the period. For long evaluation windows with stable contribution patterns, the figure is robust; for short windows with concentrated flows, it can be misleading.

Finally, IRR can produce multiple solutions when the cash flow pattern alternates signs more than once, which is unusual for typical portfolio cash flows but can occur in cases involving leverage or short positions. In those cases, the modified IRR (MIRR) or other variants are appropriate.

Money-weighted return in pfolio

Money-weighted return is not currently displayed in pfolio Insights. The platform's analytics report time-weighted return (CAGR, cumulative return) on the asset or portfolio, computed independently of contribution and withdrawal timing. Investors who want to compute their own personal IRR—accounting for the timing of their cash flows—can do so externally using the time-weighted return series alongside their contribution history.

Related articles

• Time-weighted return: the standard for measuring performance independent of cash flows
• CAGR explained: what compound annual growth rate means for your portfolio
• Dollar-cost averaging: what it is, when it helps, and when it does not
• Lump sum investing vs dollar-cost averaging: what the evidence says about timing