Finance⏱ 6 min read
How to Calculate the True Return on Your Investment Portfolio
Simple return calculations miss the effect of deposits, withdrawals, and timing. Here's how to calculate time-weighted and money-weighted returns correctly — and what each one means.
Calculating portfolio returns sounds simple — but deposits and withdrawals distort the calculation in ways that make a poor-performing portfolio look good and vice versa. Here's how to do it correctly.
Simple Return (When There Are No Cash Flows)
Simple Return % = (Ending Value - Starting Value) / Starting Value x 100
Start: £10,000
End: £12,400
Return = (12,400 - 10,000) / 10,000 x 100 = 24%
Annualised (3-year period):
CAGR = (12,400/10,000)^(1/3) - 1 = 7.44% per year
The Problem: Deposits and Withdrawals
Example with a contribution:
Start: £10,000
Month 6: deposit £20,000 (portfolio now worth £30,500)
End of year: portfolio worth £31,000
Simple return: (31,000 - 10,000 - 20,000) / 10,000 = 10%?
But the £20,000 was only invested for 6 months.
The true performance picture is distorted.
Money-Weighted Return (MWR / IRR)
MWR = the discount rate that makes NPV of all cash flows = 0
It answers: "What rate did MY money earn?"
It rewards/penalises you for timing decisions.
Start: -£10,000 (invest)
Month 6: -£20,000 (deposit)
End month 12: +£31,000 (current value)
Solve for r (monthly): using trial and error or financial calculator
MWR ≈ 1.44% per month = 18.8% annualised
If you deposited the £20,000 just before a market drop,
your MWR would be lower than the fund's actual performance.
If you deposited before a rally, your MWR would be higher.
Time-Weighted Return (TWR)
TWR removes the effect of your timing decisions.
It measures manager/market performance independent of cash flows.
This is the standard used by fund managers.
Step 1: Split the period at each cash flow event
Step 2: Calculate return for each sub-period
Step 3: Chain-link the sub-period returns
Sub-period 1 (months 1-6):
Start: £10,000, End before deposit: £10,200
R1 = (10,200 - 10,000) / 10,000 = 2%
Sub-period 2 (months 7-12):
Start: £30,200 (10,200 + 20,000 deposit), End: £31,000
R2 = (31,000 - 30,200) / 30,200 = 2.65%
TWR = (1 + 0.02) x (1 + 0.0265) - 1 = 4.69% for the year
Which Return to Use When
MeasureBest ForWhat It Shows
Simple returnNo cash flowsTotal portfolio growth
MWR / IRRPersonal finance decisionsHow YOUR money performed (timing-sensitive)
TWRComparing managers/fundsInvestment skill, independent of cash flow timing
CAGRLong-term comparisonsEquivalent steady annual rate
Benchmarking Your Returns
Benchmark comparison:
Your portfolio TWR: 8.3%/year over 5 years
FTSE All-World ETF TWR: 11.2%/year over same period
Alpha = Portfolio return - Benchmark return
Alpha = 8.3% - 11.2% = -2.9%
This is negative alpha — you underperformed the index by 2.9%/year.
Over 10 years, this difference compounds significantly:
£50,000 at 8.3% for 10 years: £110,800
£50,000 at 11.2% for 10 years: £144,600
Difference: £33,800 — the real cost of underperformance.