Money-Weighted vs Time-Weighted Returns: Don't Grade Yourself Wrong

Introduction

Money-weighted return and time-weighted return are two ways to measure how an investment or portfolio has performed over time. The first looks at your actual experience, including the timing of deposits and withdrawals. The second isolates the investment manager or strategy by removing the effect of cash flows.

Why does this matter to you? If you're adding money monthly, or you want to judge a manager, picking the wrong measure can give you a misleading grade. Which one tells your personal story and which one tells the investment's story?

In this article you'll learn the core difference between these returns, when to use each, how to calculate them in simple steps, and a beginner spreadsheet outline so you can track performance without a finance degree.

Key Takeaways

• Money-weighted return, also called internal rate of return or IRR, reflects your actual gains after accounting for the timing and size of your deposits and withdrawals.
• Time-weighted return removes the effect of cash flows so you can evaluate the investment or manager performance alone, useful when comparing funds or advisors.
• If you add money regularly, your money-weighted return will usually differ from the time-weighted return, sometimes substantially.
• Use simple spreadsheets to calculate both: IRR functions for money-weighted return and stepwise subperiod returns for time-weighted return.
• Know your goal: measure your personal outcome with money-weighted return or judge a strategy with time-weighted return.

What is Money-Weighted Return (IRR)?

Money-weighted return measures the return that makes the net present value of your cash flows equal to the investment's ending value. It is also called the internal rate of return, or IRR. This metric answers the question, what annualized rate did my money actually earn given when I contributed and withdrew funds?

Plain-language example

Imagine you put $1,000 into a fund, add $100 a month for a year, and end with $2,500. The IRR accounts for the fact that money you added later had less time to grow. The number you get is what you actually earned. That matters because you're the one moving money in and out of the account.

How it's calculated

Practically you list each cash flow as negative for money you put in and positive for money you take out or the final value. Then you solve for the rate that makes the sum of discounted cash flows equal zero. Spreadsheet programs have an IRR or XIRR function that does this for you.

What is Time-Weighted Return?

Time-weighted return measures the compound growth of $1 invested in an account, ignoring the timing and size of cash flows. It answers the question, how did the investment itself perform, independent of when you added or removed money?

Plain-language example

Suppose a fund gains 10% in month one, then loses 10% in month two, and you added money between months. Time-weighted return breaks the period into subperiods between each cash flow, computes each subperiod return, and multiplies them together. That means the manager's performance is shown without being distorted by your deposits.

How it's calculated

You split the full time into subperiods whenever there's a cash flow. For each subperiod, compute the return as (ending value minus starting value minus flows during the subperiod) divided by the starting value. Then chain-link subperiod returns to get the overall time-weighted return.

When to Use Each Measure

Which one should you use? It depends on your goal. Ask yourself, are you judging your own savings habit or are you evaluating an investment manager?

• Money-weighted return is best when measuring your personal results. It shows how your deposits and their timing affected what you earned. If you add money monthly, this is usually the number you care about.
• Time-weighted return is best when comparing investment products, funds, or managers. It isolates performance and allows fair comparisons across accounts with different cash flow patterns.

For example, if you invest with $Vanguard and you move money in irregularly, your money-weighted return may be lower or higher than a fund's published time-weighted return. If you want to compare $AAPL performance to $SPY over the same period, use time-weighted return so cash flows don't skew the result.

Real-World Examples with Numbers

Example 1: Monthly contributions to an ETF

You start with $0, then each month you buy $500 of $SPY for 12 months. After 12 months the account balance is $6,300 because prices rose. Which return tells your story?

1. Money-weighted return: Treat each $500 deposit as a negative cash flow on the date you contributed, and the final $6,300 as a positive cash flow on the final date. Use XIRR in a spreadsheet to find the annualized rate. This gives the return you actually experienced.
2. Time-weighted return: Break the year into 12 subperiods, calculate each month's return on the market value ignoring the $500 added at the start of the month, then chain them. This gives the fund's performance independent of your deposit schedule.

Because you kept buying through the rise, your money-weighted return will typically be lower than time-weighted return in a rising market. You added cash progressively, so some money had less time to benefit from gains.

Example 2: Lump-sum plus withdrawal

Suppose you invest $10,000 in $AAPL, it rises 20% in six months, you withdraw $5,000, and then it falls 10% the next six months, ending at $5,940. What happened?

1. Money-weighted return will factor in your $5,000 withdrawal and may show a different annualized number because you removed gains during the up period.
2. Time-weighted return will calculate the 20% gain for the first subperiod and the 10% loss for the second, then chain them to show the investment's performance: (1.20 times 0.90) minus 1 equals 8% for the year.

In this case the time-weighted return is 8% for the investment. Your money-weighted return might be lower if your withdrawal removed more of the early gains.

Beginner Spreadsheet Outline for Tracking Both Returns

You can track both returns in a single spreadsheet. Below is a simple column-by-column outline and a short example cash-flow list you can paste into a sheet. You can build this in Excel, Google Sheets, or LibreOffice.

Required columns

1. Date, sorted ascending.
2. Beginning market value, the value at the start of the date or period.
3. Cash flow, negative for deposits you make, positive for withdrawals or final market value when using IRR.
4. Ending market value after flows and market moves.
5. Subperiod return, computed for time-weighted return.
6. Notes, to mark events like dividends or transfers.

Step-by-step setup

1. Fill rows with dates when cash flows happen and regular interval dates if you want daily or monthly subperiods.
2. Record the market value at the start and end of each subperiod and the cash flow during that period.
3. For money-weighted return use the XIRR function on the list of cash flows including the final ending market value as a positive cash flow. XIRR works with irregular dates.
4. For time-weighted return compute each subperiod return as (Ending Value minus Cash Flow during period) divided by Starting Value, then chain the returns: multiply all (1 + subperiod return) together and subtract 1.

Sample cash flows you can paste in

1. 2025-01-01, Cash Flow -1000, Market Value at end 1000
2. 2025-02-01, Cash Flow -500, Market Value at end 1520
3. 2025-03-01, Cash Flow -500, Market Value at end 2010
4. 2025-12-31, Cash Flow +2010, Final Market Value 2010

Then use XIRR on the cash flows and dates for money-weighted return. For time-weighted return compute month-by-month subperiod returns and chain them. If you want, add a column that annualizes the time-weighted return by raising the cumulative factor to the power of 365 divided by days in the period.

Common Mistakes to Avoid

• Confusing the two measures: Use the one that matches your question. If you want to know what you personally earned use money-weighted return. If you want to compare managers use time-weighted return.
• Failing to include the final market value in IRR: If you forget to add the final portfolio value as a positive cash flow you will get a meaningless IRR. Always include ending value on the last date.
• Using cash flows without exact dates in XIRR: XIRR needs correct dates to annualize properly. Use the actual dates you made contributions or withdrawals.
• Comparing apples to oranges: Don't compare your cash-flow-heavy personal return to a fund's time-weighted performance. That will often unfairly make the fund look better or worse.
• Ignoring fees and taxes: Both returns exclude taxes unless you record them as cash flows. Fees charged inside a fund are usually reflected in the market value, but platform fees you pay separately should be entered as cash flows.

FAQ

Q: Which return will I see on my brokerage statement?

A: Brokerages vary. Many show money-weighted return because it reflects your actual account activity. Some give time-weighted return for performance versus benchmarks. Check the statement header or help text to know which one you are looking at.

Q: Can money-weighted return be negative while time-weighted is positive?

A: Yes. If you bought heavily before a drop and then the fund recovered, the investment's time-weighted return might be positive while your money-weighted return is negative because your timing was unlucky.

Q: Is XIRR the same as money-weighted return?

A: Yes, XIRR is the spreadsheet function that computes the money-weighted return for irregularly timed cash flows. It returns the annualized IRR based on the cash flows and dates you provide.

Q: Do dividends change the calculation?

A: Dividends are captured in both methods if they change the account market value or if you record them as cash flows. If dividends are reinvested, they will affect the ending market value and subperiod returns, so include them in your values.

Bottom Line

At the end of the day, both money-weighted and time-weighted returns are useful tools, but they answer different questions. Use money-weighted return to measure what you personally earned and time-weighted return when you want to evaluate an investment or manager on a level playing field.

Start tracking both in a simple spreadsheet. Record dates, cash flows, and market values. Use XIRR for money-weighted return and chain subperiod returns for time-weighted return. That way you won't accidentally grade yourself wrong, and you'll have clear numbers to guide your next steps.

Next step: set up the spreadsheet, enter your last 12 months of cash flows, and compare the two returns. Ask yourself which number matters most for your goal and use that to inform how you measure success.