The money weighted rate of return (MWRR) is a percentage that tells you how much your portfolio has increased or decreased in value, taking into account the timing and volume of the deposits and withdrawals you’ve made into and out of your investment account.
In simple terms, that means MWRR can tell you what return you’ve seen on your investments by looking at when and how much you have invested overall.
By taking these cash flows and timings into consideration, MWRR gives investors a more accurate, personalised figure that tells them the total return on the investments they have made.
When you invest, you want to have the most accurate figure for how much money you have made or lost.
Many people believe that they can get this figure by simply adding up everything they’ve invested and then comparing it to the current value of their portfolio. But doing this can leave you with deeply inaccurate figures for how well your investments have performed.
MWRR takes a more nuanced approach to this process by taking into account the size and timing of cash flows into your account.
The benefit of this is that you get a more accurate picture of how your investments have performed that you can use to gauge whether or not you are reaching your investment goals.
The downside of MWRR is that, because it takes cash flows into account, it’s not useful for comparison to benchmark figures, like the FTSE 100 or S&P 500.
Imagine you deposit £1,000 into your Freetrade account and invest it in Apple shares. One year later, those Apple shares are worth £1,100.
This example makes it easy to figure out how much your portfolio has increased in value. You’ve made one investment and it’s increased by 10%.
Things get trickier when you start making deposits or withdrawals.
For example, if you deposit and invest £1,000 at the start of a year, another £500 nine months later and then sell your investments six months after that when they’re worth £1,600, then by what percentage have your investments actually grown in value?
This is what the MWRR tells you.
It determines how much your portfolio has increased in value when taking into account the amount of cash you have deposited and withdrawn from your account.
MWRR can be presented in two ways, cumulatively or as an annualised return.
At Freetrade, we calculate MWRR cumulatively.
This means the MWRR figure you see on your Freetrade app is the return on your entire investment history with us, starting from March 2nd 2020 or from the moment you opened your account if you joined Freetrade after that date. Over time we’ll be adding data from before that date and let you set different timeframes that you want to analyse.
An annualised MWRR is slightly different as it is the return on your investments calculated on a yearly basis.
As an example, imagine if you had been investing for three years. A cumulative figure would calculate the return you had seen over the entire three years.
An annualised MWRR would tell you what return on your investments you had seen on a yearly basis for those three years, rather than the three years as a whole.
If you’re one of those finance geeks that is familiar with the internal rate of return, you already know how to calculate the MWRR — it’s the same formula.
For the rest of you, calculating MWRR does require some complicated mathematics.
Doing this with a pen and paper is tricky, even if all the time periods between different cash flows are even. It’s even harder when they are irregular, which they will be for many investors.
As such, MWRR is nearly always calculated on a financial calculator or spreadsheets, like Microsoft Excel or Google Sheets. Luckily many of these programs are now free to use, so you should be able to access one of them.
To work out the MWRR of your portfolio, you’ll need to start by creating two separate columns in a spreadsheet — one containing the different cash flows and another containing the dates on which those cash flows took place.
If you want to work out the cumulative MWRR, you’ll also want to add in the total number of days that you are looking at.
Once you’ve put that information in, you can then use the XIRR function in the spreadsheet to calculate the MWRR.
Importantly, the XIRR function will give you the annualised MWRR and NOT the cumulative MWRR.
To figure out what your cumulative MWRR is you must use the following formula.
((Annualised MWRR+1)^(total no. of days you are examining ÷ 365))-1
If you try using the XIRR on the values in the image above, you’ll find that the annualised MWRR is equal to 3.12%.
When we want to work out the cumulative MWRR, our formula will look like this:
((0.0312+1) ^(918 ÷ 365)) - 1 =0.0803
Cumulative MWRR = 8.03%