What Is Money-Weighted Return (MWR) and How to Calculate It?

What is the money-weighted rate of return (MWR)? This is one of the measures used to calculate the performance of an investment. In this article, we look at it in more detail and explain how to calculate it and when to use it. We invite you to read on.

‍

What Is the Money-Weighted Rate of Return (MWR)?

‍

Money-weighted rate of return (MWR), also known as the internal rate of return (IRR), is one of the metrics used in wealth management to establish the profitability of a given investment. It takes into account the following factors:

‍

• The timing of the deposits and withdrawals,
• The size of these cash flows

‍

What is important is the fact that MWR is just one of several formulas that you can use to calculate your interest rates. As such, it will be perfect in certain circumstances, while in others, you might want to opt for a time-weighted rate of return or a simple rate of return. We will elaborate on that further in this article.

‍

Money-Weighted Rate of Return Formula

‍

To calculate the money-weighted rate of return, you first need to gather the following information:

‍

• Initial investment (C₀)—the amount invested at the beginning (negative).
• Interim cash flows (C₁, C₂, etc.)—deposits(negative) and withdrawals(positive).
• Final value (C_n+1).
• Time in years (t).

‍

In our equation, the money-weighted rate of return will be marked as “r.” So, the formula looks as follows:

‍

‍

How to Calculate Money-Weighted Rate of Return with Ease?

‍

As you can see, the formula is quite complicated. This is why there are multiple ways how you can make this process easier.

‍

Financial Calculators

‍

The first option is the most simple. All you need is a special financial calculator into which you can input all the relevant data and have the job done for you.

‍

• Clear the memory.
• Input cash flows, one at a time:some text
  • [CF], enter C₀, [ENTER],
  • [↓], enter C₁, [ENTER],
  • [↓], enter C₂, [ENTER],
  • and so on.
• Enter timing (the calculator assumes it’s regular by default):some text
  • [F]
  • [↓], move to <F01>, enter the frequency,
  • [↓], move to <F02>, enter the frequency,
  • and so on.
• Calculate the IRR:some text
  • [IRR],
  • [CPT].

‍

Microsoft Excel/Google Sheets

‍

You may also use the XIRR formula in Microsoft Excel/Google Sheets. Here, the syntax looks as follows:

‍

XIRR(cashflow_amounts, cashflow_dates, [rate_guess])

‍

You can input the flows as arrays or ranges in the right spots. For instance, if you want to calculate the money-weighted rate of return for cashflows in fields B2, B3, B4, and B5, with time in fields C2, C3, C4, and C5, you should input:

‍

XIRR(B2:B5, C2:C5, [rate_guess])

‍

The rate_guess parameter is 0.1 by default, but you can (optionally) input your estimated internal rate of return there. What is more, if the time intervals are regular, you can use the IRR formula instead.

‍

IRR(cashflow_amounts)

‍

WealthArc Platform

‍

Finally, you can use the WealthArc wealth management platform. It comes with multiple features, one of which is the possibility of calculating the money-weighted rate of return. This way, you won’t need any additional calculators or spreadsheets—you can conduct all your wealth-management-related activities on a single platform.

‍

When to Use Money-Weighted Rates of Return? Pros and Cons

‍

As we mentioned before, money-weighted rates of return serve their purpose in certain situations, while in others, it is better to opt for different metrics. Therefore, let us look at the pros and cons of this particular formula and decide when it is the best choice.

‍

Pros of Money-Weighted Rates of Return

‍

• It shows you whether the investment provides a consistent return in the long run.
• It enables you to analyze the impact of deposits and withdrawals on your investments.
• It shows the rate of return for the investor considering their cash flow decisions.

‍

Cons of Money-Weighted Rates of Return

‍

• It isn’t comparative—MWR won’t be effective when juxtaposed against other investments in the portfolio.
• It cannot be used to evaluate the effectiveness of your whole investment strategy.
• The weighing and deposit/withdrawal timing can impact the overview, especially when cash flow occurs near the end of a measurement period.

‍

When Does Money-Weighted Rate of Return Work Best?

‍

The MWR is excellent for assessing the personal investor’s rate of return for the purpose of internal investment decisions and financial planning. It is an excellent metric for determining the future cause of action on a particular investment or similar ones. Simply said, measure it when you want to determine the return rates in accordance with investor behavior and long-term stability.

‍

For other situations, use a time-weighted rate of return or a simple rate of return. You should also remember that using one of the rates does not prevent you from using the other—you can calculate different rates of return metrics on the same investments depending on your goals.

‍

The Takeaway

‍

The money-weighted return rate has limitations and might be slightly complicated, but it is a helpful investment performance indicator. Therefore, we recommend learning how to calculate it easily to streamline the process. If you do not want to use external calculators or battle Microsoft Excel/Google Sheets, consider invest in WealthArc, a comprehensive our complex platform for external wealth managers, family offices, and banks!

‍

Did you like this article? In this case, you may also read: Intricacies of data accuracy in Wealth Management