Are you looking for a simple way to track how your investment portfolio is performing?
You’ll need to determine your money-weighted rate of return (MWRR), also known as the internal rate of return (IRR). This is the annualized rate of return of your portfolio taking into account your personal contributions and withdrawals.
However, manually calculating your investment portfolio’s money-weighted rate of return is not a trivial task. This money-weighted rate of return excel calculator is an easy-to-use tool that takes the headache out of performance tracking and keeps you up-to-date with your portfolio returns.
How to use the Money-Weighted Rate of Return Calculator
Using the money-weighted rate of return excel calculator is straightforward.
Here’s what you’ll need to fill in:
- The starting value of your portfolio, along with the starting date
- The ending value of your portfolio, along with the ending date
- The value of any contributions or withdrawals made in the account, and the dates that they were made
These inputs correspond to the light gray cells in the excel calculator, as shown below.
And that’s it! In the example above, the calculator outputs a money-weighted rate of return of 9.90%.
(Note that if the period is less than one year, it will display the actual rate of return.)
Understanding your Money-Weighted Rate of Return
The money-weighted rate of return (or internal rate of return) is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.
This benchmark value is the equalizer of all investment opportunities and it allows you to compare the rate of return of various investment opportunities, whether it be in the stock market or physical real estate, whatever the investment project might be.
Using technical jargon might seem confusing, so here’s an easier way to understand the MWRR.
Think of the money-weighted rate of return to an investment portfolio like the interest rate is to a savings account.
That is, the MWRR could be thought of as the constant rate of return required, given the specified cash flows into and out of the account, to lead to the final investment value.
Compare two accounts, one being a savings account with a 5% interest rate and another being an investment portfolio with a 5% money-weighted rate of return. If both accounts have the same starting value and made the same deposits and withdrawals at the same times, then the final value of these accounts at the end of the period would be equal.
As you can see, this metric gives you an easy way to compare the performance of different types of investments.
Money-Weighted Rate of Return v.s. Time-Weighted Rate of Return
Your portfolio’s money-weighted rate of return is dependent on your specific situation because it takes into account the effects of your individual deposits and withdrawals.
This is in contrast to the time-weighted rate of return (TWRR), which only considers the performance of the underlying stocks and equities that make up your portfolio irrespective of your own personal contributions and withdrawals from the account.
Think of the TWRR as your rate of return if you did not make any deposits or withdrawals during the period, or the rate of return of the “1st dollar” invested into the portfolio. In contrast, think of MWRR as the “actual” rate of return including the impacts of any deposits and withdrawals.
How do the timing of your cash flows affect the rate of return? Here are some possible scenarios:
- If a large deposit is made and the portfolio subsequently increases in value, the gain impacted the portfolio more, so the money-weighted rate of return > time-weighted rate of return
- If a large deposit is made and the portfolio subsequently decreases in value, the loss impacted the portfolio more, then the money-weighted rate of return < time-weighted rate of return
- If a large withdrawal is made and the portfolio subsequently increases in value, the gain impacted the portfolio less, so then the money-weighted rate of return < time-weighted rate of return
- If a large withdrawal is made and the portfolio subsequently decreases in value, the loss impacted the portfolio less, then the money-weighted rate of return > time-weighted rate of return
- If there were no deposits or withdrawals made during the period, then the money-weighted rate of return = time-weighted rate of return
Therefore, two investors could invest in the same portfolio allocation and have the same TWRR but have drastically different MWRRs. That’s why to calculate your personal rate of return, you should determine your MWRR.
Have any questions about the money-weighted rate of return or the calculator? I’ll be glad to answer below in the comments.