Money-Weighted Rate of Return

In general, a rate of return measures the performance of an investment. You put $10,000 into the new country line dancing studio opening up across the street from your apartment. Now, three years later, you want to know if it was a good investment. A rate of return will let you know.

There are two basic ways to track performance: money-weighted rate of return and time-weighted rate of return.

Time weighted-rate of return is the typical version you hear about in commercials for mutual funds, and from those guys screaming about gold in the YouTube pre-roll videos. It's the standard way that investment people brag about how well they've done.

Money-weighted rate of return provides a more personalized model. It takes into account all the withdrawals and deposits you make during the investment. It includes all the factors impacting your venture: the timing and size of various cash flows.

The money-weighted rate of return provides the same information as the internal rate of return.