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Comparing Money-Weighted Returns Versus Time-Weighted Returns

MWRR/XIRR is a different way of measuring your returns compared to the traditional TWRR/CAGR. Both have their strengths and each has its weaknesses.

There are usually a few prevalent ways to see if your portfolio or net wealth is performing well, versus others.

But the most common debate has been Time-Weighted Rate of Return (TWRR) and Money-Weighted Rate of Return (MWRR).

Another name for MWRR is also the Extended Internal Rate of Return (XIRR). TWRR is also known as Compounded Average Growth Rate (CAGR).

The performance difference between TWRR and MWRR is based on what has a heavier weight

  • TWRR/CAGR: Weighted more heavy to time. So those transactions that are older, their performance will matter more than those transactions that are younger
  • MWRR/XIRR: Weighted more heavy to money. So those transactions that are larger in value, their performance will matter more than those transactions that are smaller in value

So which one is better?

The answer is that each has its own advantages

  1. TWRR/CAGR is good if you wish to show the returns over different time frames, with no bias towards the investment actions of the investor/fund manager
  2. MWRR/XIRR is more applicable if you wish to show the quality of the investor/manager
  3. TWRR/CAGR typically shows the performance of the investment/stock/REIT/bond you wish or bought into. MWRR/XIRR shows the investment decision you made.

Let us go through some examples hopefully, I can explain well.

TWRR/CAGR is Great to Show a Model Portfolio’s Performance Returns

Dimensional Emerging Markets Large Cap Index 2000 to 2019 (19 years)

The chart above shows the growth of wealth of $1 invested at the start of 1st Jan 2000 into a Dimensional Emerging Markets Large Cap Index and your wealth at the end 20 years later.

Your $1 becomes $6.48. That is seriously good returns!

If we use TWRR/CAGR to measure the returns is 9.8% a year. If you ask most investor they will be happy with this return. TWRR is great at showing model portfolio returns.

Factsheet of iShares Core MSCI World UCITS ETF

TWRR/CAGR is what you will see in all your unit trust, hedge funds factsheets.

In the above factsheet, it shows the annualized performance. If you hold the ETF for this long, say 3 years, your CAGR is 12.42% a year. If you look at the label of the chart, it says a growth of $10,000 USD since inception.

In other words, there is a starting point to this measurement.

If there were No Uneven Cash Flows in Your Portfolio, your MWRR/XIRR will be Equal to your TWRR/CAGR

Now, if we do not factor in when you invest your money, all these returns will be the same.

XIRR calculator computing the same Dimensional Emerging Market Large Index from 2000 to 2019

The table above is an XIRR calculator I have created in Google Sheets. It basically computes a stream of net cash flow (column E) and a series of corresponding cash flow date (column B) and throws out the result.

If you like to try out this XIRR spreadsheet, you can make a copy of my XIRR calculator here and go to the Manual XIRR tab.

In Excel or Google Sheets there is this XIRR formula that you can use.

So I contribute $1 into the portfolio on 1st Jan 2000 and I sell everything on 30th Nov 2019 and get back $6.48.

You can see the XIRR is 9.83%, which is the same as the TWRR/CAGR returns of 9.8% a year.

If you have invested at the start and there are very little cash flow movements, then your returns should be pretty close to the model portfolio in the spreadsheet. However, this is near impossible.

Usually, the fund is incepted in 2003 but you only got to know the fund in 2015. You could still measure the TWRR from 2015 to 2019 to see your compounded return in the past 5 years.

MWRR/XIRR Allows You to Know the Quality of Fund Manager or Your Own Investment and Capital Allocation Decision Making

Suppose for the same $1 we put it in the hands of the investor.

The Investor decides to put in $0.50 at the start in 2000 and $0.25 near one of the lowest points in Feb 2009 and the rest of $0.25 in 2014 after he grew so impatient that his money is not compounding.

The XIRR when we split the money into 3 batches.

We get an MWRR/XIRR of 9.7%. This is not too bad. Firstly, instead of $6.48 the money only grew to $4.26 because a lot of the money was put into work much, much later. The money did not have time to compound.

You can think of this 9.7% as the “interest rate a year” you earn for this stream of uneven cash flow over 20 years.

The MWRR/XIRR return is pretty close to the TWRR/CAGR because this investor made some good decision to only invest at a rather low price.

Now let us switch the investments around. This time let us see the return if the 2008 amount is more.

More invested in 2009 compared to the other 2 period

The XIRR is higher at 9.76%. Surprisingly, even a better decision to

  1. Wait until the market crash into the deepest part
  2. Putting in the majority of the money at that point

Didn’t earn you a better return. In fact, if we reviewed on Nov 2019, your absolute cash you get back was lower ($3.38 vs $4.26 or $6.48).

We missed out on a lot of the compounding.

More invested in 2014 compared to the other 2 periods

Finally, 2014 was not the best time to invest. In 2015, emerging markets were not doing too well and the investor’s money went into a tailspin.

Still, the XIRR is 9.26%. It definitely suffered compare to the previous 2 but not by a lot. In absolute money terms, $2.93 is lower than all the previous one but not too different if you time it well versus the one where you invested most in 2008.

I hope through this small exercise, you can see that if you break up the cash flows up, your returns will differ.

I think the most important part of this exercise might not be the difference between MWRR vs TWRR but if you invest and let time do its magic.

MWRR/XIRR allows you to factor in the Cash Drag in Your Portfolio and Your Discretionary Fund Manager’s Underperformance

When you read what people posted online about your returns, you got to ask what goes into the computation. If someone factors in all the idle cash in their portfolio, then it tells a different story from one that did not.

So let us go back to the Dimensional Emerging Market example where we invest $1 at the start in 2000.

Suppose I am scared to invest and decide to keep another $1 on the side. The purpose of this $1 is to build towards my financial independence but I was afraid of the volatility and in general, I just started out my investing journey so I do not know what I was getting myself into.

So for this $1 I put in average savings yielding 1% a year.

If you factor in this, your returns will look like:

Factors in $1 more kept in cash at 1% a year interest for 20 years

The MWRR/XIRR gets reduced overall to 7.00%.

The MWRR/XIRR reflects the wealth-building abilities of an individual or an entity better than TWRR/CAGR.

It is also myopic to tell people “Hey, I have invested in a fund that grew from $1 to $6.48!” when this is just 10% of your money, while the rest is earning 2% a year.

Your returns will look like:

$1 invested in Dimensional Emerging Market $9 invested in a 2% a year instrument

If you factor in the rest of the assets that were too conservative or are losing money, the overall portfolio MWRR/XIRR goes down to 3.5%.

A lot of the time, your overall compounded rate of return is determined by your asset allocation. You may have assets performing very well but largely speaking, most of your money is not doing too well.

MWRR/XIRR Allows You to Measure a Portfolio Made Up of Different Assets with Cash Flows of Different Timing

A lot of times, we received comments from readers or clients that our returns are not good enough.

There may be some truth to that.

However, I would also question them back: How do you measure the performance of your ENTIRE portfolio against what we put your money into?

Our solutions are very transparent and simple. If you need a 60% equity, 30% bonds, 10% cash, we put all your $5 million split into these allocation. End of each year, we can compute your returns based on exactly how much you put in when you put in.

For some folks, their “portfolio” can make up of things like this. Trust me, I am simplifying things sometimes. I have not added to the number of cash-value policies people usually have.

When you are managing this yourself, you are the investment manager and possibly the financial planner all rolled into one.

In order to compute the returns, you got to keep track of the cash inflow and outflow for each of these assets. When is the transaction and how much flowed in and out?

For most people, you cannot be the investment manager because life is already busy as it is. I wonder how many investment managers or financial planners help you with this.

As a firm, we cannot evaluate past returns well because of incomplete transaction records.

However, there is a bare minimum you could do if you arrange your assets well.

In the diagram above, we can arrange how we flow our cash through 2 accounts. The DBS account would be like an “Investment Cash” account. when you receive your pay or income from your business, it flows to your OCBC account.

You can periodically fund your portfolio by transferring your money from the OCBC account to the DBS account. When your investments need funding, the funding will come only from the DBS account. Could you have more than 1 savings account in your Portfolio (other than the DBS Account)? Yes, you can. You would just need to compartmentalize the roles of these accounts well.

The beauty of this is that you only need to take note of

  1. When you transfer from OCBC to DBS and how much
  2. When you transfer from DBS to OCBC and how much

You do not have to take note of a lot of the cash flows between each of the assets inside your portfolio. Just those 2 mention before. This makes it much more livable to keep track.

To compute your MWRR/XIRR, you record down the current value of your properties (net of mortgage), all your managed accounts, deposits and treat it as you will sell them.

So if you have consistently contribute $50,000 a year for 20 years, you can tally against the cash flow received from the DBS account into your OCBC. The XIRR/MWRR of 4.64% shows the level of your wealth management expertise.

Summary

The biggest problem we faced are usually miscommunication.

Why are returns so low? Perhaps, it is due to what goes into the calculation of the returns. Often it is due to lack of awareness of the time period.

If not it is what we are comparing against. Exclude all the poor performing assets or the assets that you cannot remember, but a prospective investment against the best performing fund you owned.

This miscommunication is the most prevalent among the property investing crowd. I got so many comments saying my property post is overly optimistic, too pessimistic at the same time.

Each individual property is unique. What is the net of downpayment, renovation, furnishing, constant maintenance capital expenditure, paying agents, collecting rental, property taxes, air-con servicing, seller stamp duty, buyer stamp duty, insurance?

MWRR/XIRR is not perfect but it allows you to measure the returns of apples and oranges.

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Q

Wednesday 27th of May 2020

Hi Kyith,

thanks for your reply! 5.5 years now.

Q

Tuesday 26th of May 2020

Hi Kyith,

I've been reading your web to slowly learn about investing and I'm glad I came across this article. Youtube and other articles certainly did not help me understand these terms much. I understood the top part but I got lost once the MWRR takes into account of cash & other assets. Will have to re-read it.

Just 1 question. For eg. I have a TWR of 12% but a XIRR of 1%. This XIRR does not take into account of cash I'm holding. Does this mean my investment decision making sucks but somehow the portfolio is able to generate a decent TWR? (Pardon me, I'm assuming 12% is decent cause I've no idea) Sorry to take up your time, thank you.

Kyith

Tuesday 26th of May 2020

Hi Q, no worries, you are one of the few that found this helpful haha. can i find out your XIRR was over how long?

melvin

Thursday 9th of April 2020

Hi, this is late reply. I came to this page from a search about these terms. After reading your article, I am definitely more clearer that most articles

A lot of the websites giving calculations etc...but that is not what I am interested in. I just want to under the terms and when should I use either one to check my own investment portfolio.

This has been the best article I have read so far. However, there are a few areas where I was confused when you show the excel examples. I am guessing, I am still blur at that part.

But, I truly understand both these terms and its application way way better after reading your article.

Thank You so very much!

Kyith

Thursday 9th of April 2020

HI Melvin, thanks for leaving a comment here. Let me know if you need further elaboration. Means a lot to me after getting some constructive criticism about it. I do agree this is not a simple subject to explain.

SG investor

Sunday 5th of January 2020

Hi Kyith,

"A lot of times, we received comments from readers or clients that our returns are not good enough."

What kind of returns are clients and readers not satisfied with? 5% MWRR? What kind of MWRR do most people expect?

Kyith

Sunday 5th of January 2020

Hi SG Investor, It is not a 5% MWRR but perhaps when they see a fund and we give a conservative return of 5% in our planning. In planning, we have to be conservative and cannot use the average figure. inevitably, sometimes a lot forget that in their own management they waited and waited, often having too much cash then a more balanced allocation.

Amateur Investor

Sunday 5th of January 2020

I thought it is quite well explained, but just not suitable for someone who is new to investing.

Kyith

Sunday 5th of January 2020

Hi Amateur investor, i will try to do better. Not an easy topic for me.

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