Time-Weighted Return vs IRR: The Right Way to Measure Your Portfolio Performance

You open your broker app and see:

• Today's gain/loss
• Maybe a total percentage since you started

But what does that number really mean?

Is it telling you how good your investments have been, or just how much money you added along the way?

To answer that properly, you need to understand two key metrics:

• Time-Weighted Return (TWR)
• Internal Rate of Return (IRR) – sometimes called money-weighted return (MWR)

Let's break down what they are, when to use each, and how tools like Arfin can help you see your real performance.

The core problem: contributions vs performance

If you:

• Invest €500 per month
• Occasionally add lump sums
• Hold multiple positions across several accounts

…it becomes tricky to answer simple questions like:

• "How well has my portfolio performed?"
• "Did I beat the market?"

That's because cash flows (deposits and withdrawals) can dominate your results.

To separate skill/strategy from cash timing, we use performance measures designed to handle cash flows properly.

What is Time-Weighted Return (TWR)?

Time-Weighted Return measures how a portfolio performed as if there were no cash flows, by:

• Breaking your investment history into sub-periods (between contributions/withdrawals)
• Calculating the return of each sub-period
• Chaining those returns together

What that means in practice:

• TWR shows the pure performance of your investments
• It removes the effect of when you added or withdrew money
• It's the right metric for comparing yourself to an index or fund

Use TWR when:

• You want to know: "Did my portfolio beat the market?"
• You're evaluating your strategy rather than your deposit timing
• You're comparing different brokers or portfolios

What is IRR (money-weighted return)?

Internal Rate of Return (IRR), also known as money-weighted return, answers a different question:

"Given the timing and size of all my cash flows, what annualised return did I personally achieve?"

It:

• Takes into account when you added or withdrew money
• Weighs returns more heavily when more money was invested

So:

• If you invested a lot right before a big bull run, your IRR might be very high
• If most of your money arrived before a big crash, your IRR might be much lower than your TWR

Use IRR when:

• You want to know: "What did I earn on my money, given when I invested?"
• You're analysing your behaviour (timing decisions)
• You want to compare real outcomes from different strategies (e.g. lump sum vs DCA)

Which one should you look at?

You actually want both – for different reasons.

For strategy & benchmark comparison: use TWR

• Compare your portfolio to an index or ETF
• Evaluate if your choice of assets makes sense
• Understand whether your portfolio construction is working

For personal outcomes & behaviour: use IRR

• Understand your real, personal rate of return
• See the impact of buying high or low
• Analyse how much timing and emotions affected your results

Why broker apps often confuse the picture

Many broker apps:

• Show a single performance number without explaining how it's calculated
• Don't handle complex cash flows well
• Focus on short-term P/L, not long-term performance

This can lead to:

• Overconfidence ("I'm up 50%!" – after adding lots of cash near the top)
• Unnecessary pessimism ("I'm barely up…" – even if your underlying strategy is sound)

A dedicated analytics tool should:

• Clearly separate cash flows from performance
• Offer both TWR and IRR/MWR
• Provide intuitive charts over time

How Arfin approaches performance

Arfin is designed to give long-term investors a clear, honest performance view.

By pulling in data from your brokers (via CSV imports and, later, connections), Arfin can:

• Calculate time-weighted returns to show how your portfolio actually performed vs the market
• Calculate money-weighted returns (IRR) to show your real, personal outcome
• Align these numbers with your net worth and FIRE goals

Instead of staring at a single vague percentage, you'll be able to see:

• How much of your result came from markets
• How much came from your contributions and timing

Takeaways

• Use TWR to evaluate your investment strategy and compare to benchmarks
• Use IRR (money-weighted return) to understand your personal outcome given your cash flows
• Don't rely on simplistic performance numbers from broker apps
• Use tools that give you both perspectives and tie them into your overall wealth picture

If you'd like to see both of these metrics in a single, unified dashboard – alongside all your banks and brokers – consider joining Arfin's waitlist. We're building performance analytics with long-term investors and FIRE-minded people in mind, not day traders.