Money Weighted Return Calculator





 

Introduction

The Money Weighted Return (MWR), also known as the Internal Rate of Return (IRR), is a metric used to assess the performance of an investment portfolio. Unlike the more straightforward Time Weighted Return (TWR), which calculates returns based on time intervals, the Money Weighted Return takes into account the actual cash flows into and out of the portfolio. In other words, it considers the timing and size of your contributions and withdrawals.

Formula:

To calculate the Money Weighted Return, you can use the following formula:

MWR = ((PV of all investments) + (FV of all withdrawals)) / (PV of all investments) – 1

Where:

  • PV of all investments: The present value of all your contributions or investments into the portfolio.
  • FV of all withdrawals: The future value of all withdrawals or distributions from the portfolio.

How to Use?

Using a Money Weighted Return Calculator is quite straightforward. Here are the steps to calculate your MWR:

  1. Gather the relevant data: You will need information on all your contributions (deposits) and withdrawals from your investment portfolio. Make sure to record the date and amount of each transaction.
  2. Input the data: In the MWR calculator, input the date and amount of each contribution and withdrawal.
  3. Calculate MWR: Once you’ve entered all the data, the calculator will provide you with your Money Weighted Return. This percentage represents your actual returns considering the timing and size of your investments.
  4. Interpret the results: A positive MWR indicates that your investments have performed well, while a negative MWR suggests that your investments have not performed as expected. The larger the MWR, the better your investments have performed in relation to your contributions.

Example:

Let’s illustrate the concept of Money Weighted Return with an example:

Suppose you invested $10,000 in a mutual fund on January 1st, and after a year, your investment grew to $11,000. You decided to withdraw $2,000 from your portfolio on July 1st. On December 31st, your remaining investment was worth $10,500.

Using the Money Weighted Return formula:

MWR = ((10,000 – 2,000) + 10,500) / 10,000 – 1 MWR = (8,000 + 10,500) / 10,000 – 1 MWR = 18,500 / 10,000 – 1 MWR = 1.85 or 185%

So, in this example, your Money Weighted Return for the year is 185%, indicating a substantial return on your investment, taking into account both your contribution and withdrawal.

FAQs?

Q1: How does Money Weighted Return differ from Time Weighted Return (TWR)?

A1: Money Weighted Return considers the impact of cash flows, such as contributions and withdrawals, on your investment returns. Time Weighted Return, on the other hand, focuses solely on the performance of the investment assets themselves and does not take cash flows into account.

Q2: Is a higher Money Weighted Return always better?

A2: Not necessarily. While a higher MWR indicates good performance, it may also mean that you have been taking on more risk. It’s crucial to consider your risk tolerance and investment goals when interpreting MWR.

Q3: Can the Money Weighted Return be negative?

A3: Yes, it is possible to have a negative MWR if your withdrawals exceed your contributions or if your investments perform poorly relative to your contributions.

Conclusion:

The Money Weighted Return Calculator is a valuable tool for investors to evaluate the actual performance of their portfolios, considering the timing and size of their contributions and withdrawals. By understanding your MWR, you can make more informed investment decisions and assess whether your portfolio is aligning with your financial goals. Remember that while a positive MWR is generally desirable, it should always be considered in conjunction with your risk tolerance and long-term objectives. Stay informed, and may your investments thrive!

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