The Relationship Between Money-Weighted Return (MWR) and XIRR

Money-weighted return (MWR) is a method that measures the annualized return you actually earned by reflecting even the 'timing and amount' of when you put money in and took it out. In finance it's also called the internal rate of return (IRR). They're effectively the same concept.

The core idea is this. You line up on a time axis what you put in (minus) and your current valuation and money received (plus), and find 'the return that makes the present value of all these cash flows sum to 0.' That return is exactly your MWR.

Why does timing matter? If you happened to put a large sum in at a peak, your average return falls even if the fund itself does well. Conversely, if you put a lot in at a crashed trough, your return can beat the fund's own performance. MWR captures this 'timing effect' as is.

XIRR is 'Extended IRR' — the extended internal-rate-of-return function. In Excel or Google Sheets, you write it as =XIRR(amounts, dates). The value calculated here is exactly the MWR. So 'MWR is obtained via XIRR' holds.

The difference from the IRR function is 'dates.' Plain IRR assumes all cash flows occur at equal intervals (e.g., year-end). But actual investing is irregular: $220 in March, suddenly $740 in July, a small withdrawal in November… XIRR attaches an 'actual date' to each cash flow and reflects this irregularity precisely.

The equation XIRR solves is this. You discount each cash flow P by (how many days have passed since the first date ÷ 365) and find the annual rate r at which the total sums to 0. In formula form: Σ [ P_i ÷ (1+r)^((d_i − d_1)/365) ] = 0. Excel finds this r very precisely through iterative calculation.

A commonly confused counterpart is the time-weighted return (TWR). TWR, conversely, 'strips out deposit/withdrawal effects entirely' and looks purely at how much the product itself rose. It cuts the period at each point money flows in or out and links the sub-period returns together. That's why the official standard (GIPS) for comparing fund/manager performance is TWR.

Summed up in one sentence: TWR is 'the manager's return,' and MWR (= XIRR) is 'my wallet's return.' Because you, not the manager, decide when and how much to put in.

The difference between the two is precisely 'your timing score.' If your MWR is lower than TWR, it means there's a 'buy high, sell low' trace — you put in less just before a rise, or a lot just before a fall. Conversely, if MWR is higher, it means you bought in well at the lows.

This difference shows up in statistics too. The QAIB report from DALBAR, a U.S. investor-behavior research firm, compares 'the return the average investor actually earned' with the index return every year, and almost every time the investor side lags.

For example, in the single year 2024, the average U.S. equity investor earned about 16.5%, while the S&P 500 index rose about 25.0% over the same period. That's a lag of roughly 8 percentage points, and 'bad timing' — entering an upswing late or fleeing in fear — was pointed to as the main cause. Even in long-term (multi-decade) tallies, results repeatedly show the average investor about a few percentage points below the index.

But this figure varies by tally period and methodology, and there are criticisms of DALBAR's approach, so rather than memorizing 'exactly X%,' it's better to take it as the lesson that 'it's common for your actual return (MWR) to fall below the product's return (TWR) because of timing.' In periods with a large maximum drawdown, this gap grows especially wide.

If you're someone who puts in small amounts each month via recurring investing, your true report card is not the simple return but the MWR (XIRR). Because the dates and amounts you put in are all different. Conversely, if you want to judge 'was this product itself good,' look at TWR.

'The Return of Almost Everything' is a site the author runs personally, built so you can see these calculations with your own eyes. It shows, without hiding, how the results diverge between putting a lump sum in all at once and spreading it out monthly (recurring), along with the maximum drawdown, drawdown (loss) duration, fees, and FX. In the related links below, enter your own cash flows and check for yourself how timing changes your return.