Money-weighted return

The money-weighted return, also known as the internal rate of return (IRR) in technical terms, is a method for measuring the performance of an investment that takes all deposits and withdrawals into account. Unlike the time-weighted return, which measures only the percentage performance regardless of cash inflows, the cash-weighted return explicitly accounts for when and how much capital was invested or withdrawn.

The underlying logic is mathematically simple: periods during which a large amount of capital is tied up in the portfolio have a greater impact on the overall result than periods with low investment volumes. For example, if an investor invests a large sum shortly before a market phase with high price gains, the money-weighted return will be very positive. If, on the other hand, a deposit is made immediately before a price decline, the personal return is negatively impacted by the unfavorable timing, even if the security or portfolio itself demonstrates solid, long-term performance.

In practice, this metric is particularly meaningful for retail investors, as it reflects actual wealth growth while taking into account their own investment behavior. It answers the question of what effective interest rate the invested capital has achieved over the entire term. Thus, it serves less as a measure of the quality of a fund manager or an investment strategy, and more as a summary of individual investment decisions and the timing of cash flows.

True Wealth enables its clients to present portfolio returns as both time-weighted and money-weighted returns. The individual multi-asset benchmark also provides a tool for comparing the return on one’s own portfolio—often diversified across multiple asset classes—with a theoretical benchmark.

In the following blog post, we explore this topic in more detail using concrete examples: Calculating Portfolio Returns.