XIRR vs time-weighted return: which one is your real return?
Same market, same time-weighted return, different XIRR: why your own return depends on when you added money, and which of the two to trust.
Your broker shows one return, a fund factsheet shows another and a spreadsheet gives you a third. Most of the gap is two different questions: what did the market do, and what did your money do?
Time-weighted return: what the market did
Time-weighted return (TWR) splits the period at every deposit and withdrawal, takes the return of each stretch and chains them together. Each stretch is measured on the money that was invested at the time, so when you added money stops mattering. That is why it is the figure to compare with a fund, an index or a manager: a published fund return is a time-weighted one.
Money-weighted return (XIRR): what your money did
Money-weighted return asks a different question: what yearly rate would turn each deposit, on the day you made it, into what you hold now? Spreadsheets call it XIRR. It weighs every unit of money by how long it was invested, so it moves with your timing. Add a large amount just before a fall and it drops, even if the market recovers afterwards.
One market, two investors
Take a market that rises 10% in the first half of a year and falls 5% in the second. Two investors each put in 10,000 over the year, in opposite order.
- Investor A puts in 1,000 on 1 January and 9,000 on 1 July. She ends the year with 9,595, which is 405 less than she put in.
- Investor B puts in 9,000 on 1 January and 1,000 on 1 July. He ends the year with 10,355, which is 355 more than he put in.
Both got exactly the same market, so both have the same time-weighted return: 1.10 × 0.95 − 1 = +4.5%. Their money-weighted returns are not the same: about −7.2% a year for A and +3.7% for B.
Neither number is wrong. +4.5% is how the market did. −7.2% and +3.7% are how each investor's own money did, and that is the one their balance feels.
Which one should you use?
- Comparing with a fund, an index or another manager: time-weighted.
- Judging your own results, with your own deposits and withdrawals: money-weighted.
- One lump sum and nothing added afterwards: the two agree.
What FortuneOK does
FortuneOK's annualized return is money-weighted (XIRR). It pools the dated flows of every holding into one series and solves once, and it never averages the rates of individual holdings. Each flow is converted at the exchange rate of its own date, so the return reads in your own currency. A time-weighted figure sits under the portfolio value in the performance view too.
It shows no yearly rate until you have a year of history, because a rate extrapolated from a few weeks says more about timing than about performance. Before that you see the plain total return.
Try it with your own deposits in the annualized return calculator.