What is Money-Weighted Return?
Money-weighted return (MWR), also called internal rate of return (IRR), incorporates the timing and magnitude of all deposits and withdrawals to calculate your personal investment return. While time-weighted return (TWR) measures fund performance, MWR measures your performance as an investor. The difference reveals the cost of your timing decisions.
The Gap Between TWR and MWR
If a fund's TWR is 10% but your MWR is 5%, the 5% gap represents the cost of adding money at peaks and withdrawing at troughs. Dalbar research consistently shows average investors earn 2-3% less annually than the funds they own. Over 30 years, this gap cuts final wealth by more than half. MWR is the honest measure of what investing actually delivered to you.
Improving Your MWR
Automatic fixed-amount investing is the most effective way to close the MWR-TWR gap. It removes emotional timing from the equation. If you make discretionary additions, do so during extreme fear (when the Fear & Greed Index is below 20) rather than during euphoria. The goal is to make your MWR match or exceed the fund's TWR, which means being a disciplined, counter-emotional investor.