Time-weighted vs money-weighted return: your return when you keep adding money

Why simple return math breaks when you add money

Because a deposit raises your balance without being a gain. Start-and-end math counts the new money as if the investment earned it, and “gain divided by everything I put in” ignores how long each dollar was invested. Both give the wrong answer.

The time-weighted return answers “how did the investment do?” The money-weighted return answers “how did my money do?” With no deposits or withdrawals, they are the same number. Once money moves, they can be very different.

Return with contributions calculator

Enter your starting value, each deposit (or withdrawal, as a negative amount) with its date and the account value just before it, and your ending value. It shows both returns as yearly rates. It starts loaded with the example above.

For the example, the time-weighted return is 3.92% a year and the money-weighted return is about −7.7% a year. The fund did fine; the timing of the big deposit did not.

Time-weighted return: how the investments did

Split the time into stretches that start and end at each deposit or withdrawal, work out the return for each stretch, then chain them together by multiplying. Deposits drop out completely, because each stretch’s return starts from the balance after the deposit.

The catch: you need the account value on the date of every deposit. That is easy for a fund, which prices itself every day, and tedious for you. It is also why funds report this way. In a US mutual fund prospectus, performance is calculated for a hypothetical $1,000 invested at the start and held through the whole period with distributions reinvested (SEC Form N-1A, Item 26). With one investment and no further deposits, nobody’s timing affects the number, so it measures the fund itself.

Money-weighted return: how your money did

The money-weighted return is the one steady yearly rate that, applied to every deposit from its own date, would produce your actual ending balance. It is also called the internal rate of return (IRR), and in a spreadsheet you get it with XIRR.

There is no way to rearrange this for r, so calculators and spreadsheets find it by trial: guess a rate, see if the deposits grow to the ending value, adjust, and repeat until it fits.

Timing cuts both ways. Flip the years: $1,000 falls to $900, you add $10,000, and the next year gains 20%, ending at $13,080. The time-weighted return is the same 8% over two years (0.90 × 1.20), still 3.92% a year. The money-weighted return is +17.09% a year, because most of your money was in for the good year.

How to calculate XIRR in Excel and Google Sheets

Put every cash flow in one column with its date in the next, then use =XIRR(amounts, dates). It works the same way in Excel and Google Sheets. The signs matter: money you put in is negative, money you take out is positive, and the current balance goes last as a positive number, as if you cashed out today.

• Evenly spaced cash flows: =IRR(values) works without dates and gives a rate per period. For the first example, yearly flows of −1,000, −10,000 and 10,080 give =IRR(B2:B4) = −7.72% a year.
• Monthly contributions: list each one. Twelve rows a year is fine; XIRR handles hundreds.
• Dividends you reinvested: leave them out. They never left the account, so they are part of the balance, not a cash flow. Dividends paid out to your bank count as withdrawals.

The Modified Dietz shortcut

Modified Dietz is a quick, close estimate of the money-weighted return for one period, usually a year, that you can do by hand. It divides the gain by the average amount of money that was in the account, weighting each cash flow by the share of the period it was invested.

Modified Dietz works well over a year or less. Over several years, use XIRR, because Dietz does not compound.

Dollar-cost averaging and the behavior gap

Investors as a group earn less than the funds they own, because money tends to arrive after prices have risen and leave after they have fallen. The fund’s time-weighted return is the same for everyone; each investor’s money-weighted return depends on their own timing. The difference is often called the behavior gap.

This is not just a thought experiment. A Morningstar study of US mutual funds and ETFs estimated that the average dollar invested earned 8.7% a year over the 10 years ended December 31, 2025, about 1.2 percentage points a year less than the funds’ 9.9% total return, a gap it attributes to the timing and size of investors’ purchases and sales. On $10,000 held for ten years, 9.9% a year ends at about $25,700 and 8.7% at about $23,000.

What dollar-cost averaging does

Dollar-cost averaging means investing a fixed amount on a schedule, such as every paycheck. A fixed dollar amount buys more shares when the price is low and fewer when it is high, so your average cost per share ends up below the average price.

It does not always win. If the price instead climbs steadily from $40 to $55 over the four purchases and ends at $60, the same plan buys 85.4 shares worth $5,124, while a $4,000 lump sum at $40 becomes $6,000. Dollar-cost averaging is a steady habit, not a trick for beating the market; its real value is that it stops you from doing what Investor B did.

Which return answers which question?

Compare like with like. Your money-weighted return against an index’s time-weighted return mixes your timing into the comparison; if you want to judge the investment, compare time-weighted with time-weighted.

Common mistakes

• Counting deposits as gains. Your balance going up by $6,000 in a year you deposited $6,000 is a 0% return.
• Wrong signs in XIRR. Deposits negative, withdrawals and the ending balance positive. All the same sign gives #NUM!.
• Counting reinvested dividends as deposits. They were never new money.
• Trusting XIRR on a few weeks of data. It annualizes, so a small gain on money invested for a month can show as a huge yearly rate.
• Averaging yearly returns. Even the right yearly numbers need to be compounded, not averaged.