Money-Weighted Rate of Return

The money-weighted rate of return (MWRR) is a measure of the performance of an investment portfolio that takes into account the timing of cash flows. It is calculated by finding the internal rate of return (IRR) of the cash flows from the investment.

The MWRR is a more accurate measure of investment performance than the simple rate of return (ROR), which does not take into account the timing of cash flows. For example, if an investment makes a $100 profit in one year and then loses $50 the next year, the simple ROR would be 50%. However, the MWRR would be lower, because it would take into account the fact that the $50 loss occurred in the second year, after the $100 profit had already been made.

The MWRR is also a more accurate measure of investment performance than the time-weighted rate of return (TWRR), which does not take into account the size of the cash flows. For example, if an investment makes a $100 profit in one year and then loses $50 the next year, the TWRR would be the same as the simple ROR, 50%. However, the MWRR would be lower, because it would take into account the fact that the $50 loss was a larger percentage of the investment than the $100 profit.

The MWRR is a useful tool for investors who want to compare the performance of different investments or to track the performance of their own investments over time. It is also a useful tool for financial advisors who are helping clients make investment decisions.

Here are some additional points to keep in mind about the MWRR:

• The MWRR is only calculated for investments that have multiple cash flows.
• The MWRR is not affected by inflation.
• The MWRR can be negative, even if the investment makes a profit over time.
• The MWRR is not a good measure of risk.

Overall, the MWRR is a useful tool for investors who want to understand the true performance of their investments. However, it is important to keep in mind its limitations and to use it in conjunction with other investment metrics.