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MWRR vs. TWRR: Investment Performance Metrics That Matter

M1 Team
M1 Team May 30, 2025

Imagine this: You’ve meticulously built your investment portfolio over years. You’ve been disciplined about your strategy, made regular contributions, and weathered market volatility. But when you sit down to evaluate your performance, you’re faced with a frustrating realization – your calculated returns aren’t easy to understand. You need help with your investment performance metrics.

This disconnect isn’t uncommon among sophisticated investors. The truth is that how we measure investment performance is just as important as the investments themselves.  

For long-term investors, understanding the difference between performance measurement methodologies isn’t just academic – it’s essential for making informed decisions about your financial future. 

Understanding the Basics 

Before diving deeper, let’s establish a clear foundation for two critical performance measurement approaches: 

Money-Weighted Return Rate (MWRR) 

Money-Weighted Return Rate, commonly known as Internal Rate of Return (IRR), measures the performance of all cash flows in your portfolio, including buys, sells, dividends, and fees. It’s essentially answering: “What’s the return rate on the specific dollars I’ve invested, considering when and how much I invested?” 

Time-Weighted Return Rate (TWRR) 

Time-Weighted Return Rate measures investment performance independent of the timing and size of cash flows. It answers: “How has my investment strategy performed, regardless of when I added or withdrew money?” 

The fundamental difference between these two investment performance metrics centers on one key factor: the impact of cash flows. MWRR is influenced by the timing and size of your buys and sells. If you deposit or withdraw money and it doesn’t trigger a buy or sell, it doesn’t change your MWRR. TWRR focuses solely on investment performance. 

MWRR Deep Dive 

When MWRR is Most Appropriate 

MWRR shines when you want to understand your personal investment experience. It’s particularly valuable when: 

  • You want to see how your specific investment timing and your asset allocation affected returns 
  • Your focus is on your overall financial outcome 
  • You’re evaluating your own decision-making, including buy and sell timing 

Potential Advantages and Limitations 

Potential Advantages: 

  • Reflects your actual experience with investments 
  • Accounts for the impact of your buy and sell timing 
  • Shows how your specific cash flow decisions affected outcomes 
  • Provides a true picture of your personal return 

Potential Limitations: 

  • Can be skewed by large buys or sells 
  • Makes comparisons between different portfolios difficult 
  • Hard to attribute performance to market timing vs. Investment strategy 
  • Can vary significantly from published benchmark returns 

Real-World Application 

Consider an investor who made a large contribution just before a market upswing. Their MWRR would appear quite favorable – not necessarily because their investment choices were superior, but because their timing was fortunate. Conversely, an investor with an identical strategy who contributed just before a market decline would show a lower MWRR. 

This sensitivity to timing makes MWRR an excellent tool for assessing your overall financial outcome but is less helpful when evaluating your investment strategy in isolation. 

TWRR Deep Dive 

When TWRR is Most Valuable 

TWRR becomes essential when: 

  • You want to evaluate your investment strategy independent of cash flow timing or any changes you’ve made to your asset allocation over time 
  • You need to compare your performance against benchmarks or other portfolios 
  • You make regular buys or sells 
  • You’re assessing a fund manager’s or automated strategy’s performance 

Potential Advantages and Limitations 

Potential Advantages: 

  • Eliminates the impact of cash flow timing. Investers who make large buys, sells, or transfer assets from another brokerage may find this important. 
  • Provides a clear picture of investment strategy performance 
  • Enables fair comparisons between different investment approaches 
  • Aligns with how most market indices and funds report returns 

Potential Limitations: 

  • Doesn’t reflect the impact of your actual cash flow decisions 
  • May not represent your personal experience 
  • Can sometimes seem disconnected from your actual financial outcome 
  • More complex to calculate manually 

Portfolio Strategy Evaluation 

TWRR can help answer questions around investment performance metrics. By removing the influence of when you added or withdrew money, TWRR isolates the performance of the investments themselves. 

For sophisticated DIY investors, this can help with strategy refinement. It allows you to make apples-to-apples comparisons with benchmarks and alternative approaches, helping you identify which aspects of your strategy are working and which might need adjustment. 

Choosing the Right Metric 

Decision Framework 

When deciding which investment performance metrics to focus on, consider: 

  1. Your primary question: Are you asking, “How did my asset allocation perform?” (TWRR) or “What was the return on my invested dollars given my asset allocation and market timing?” (MWRR) 
  2. Cash flow patterns: Frequent buys or sells make TWRR more useful for strategy evaluation 
  3. Comparison needs: If you’re comparing against benchmarks or other portfolios, TWRR is essential 
  4. Decision evaluation: To evaluate your timing decisions*, analyze the difference between your MWRR and TWRR 

*Note: This is not investment advice, and M1 does not recommend trying to time the market.  

Portfolio Size Considerations 

For smaller portfolios where contributions make up a larger percentage of the total value, the difference between MWRR and TWRR can be significant. As portfolios grow larger, contributions become proportionally smaller, and the two metrics tend to converge. 

The Power of Informed Decision-Making 

Understanding the nuances between MWRR and TWRR empowers you to: 

  1. Identify the true drivers of your returns – Was it your investment selections or your timing? 
  2. Make fair comparisons – How does your strategy stack up against benchmarks when timing effects are removed? 
  3. Refine your approach – Which aspects of your investment method are working, and which may need adjustment? 
  4. Improve future decisions – Armed with clearer performance data, how might you approach your next investment decision differently? 

Learn more on how M1 calculates money-weighted returns here.

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