Perhap this will help you understand better.

Internal Rate of Return and Time Weighted Return. If your portfolio has cash flows, i.e. you deposit or withdraw money, then you need to use either internal rate of return, IRR, or time weighted return, TWR, also called TWRR time weighted rate of return and TWIRR time weighted internal rate of return. The difference between the two is that TWR ignores the timing of the cash flows while IRR accounts for the timing of the cash flows. Rather than explaining each in depth, I’ve created a example for each in this spreadsheet. In summary, to calculate IRR use the XIRR function in Excel, while TWR calculates returns from one cash flow to the next and sums those ignoring the cash flows.

Which of the two should you use? That question never seems to get old. If you’re a fund manager or reading the returns of a fund manager then you’re most likely using TWR. That’s because fund managers don’t have control over the cash flows, so they shouldn’t receive any benefit or penalty for the cash flows.

Individual investors should use the method they deem most appropriate. The important question is, do you have control of the cash flows. If the answer is no then use TWR, if yes then IRR is the best choice. If you are attempting to calculate your past performance then there is another important question. Do you know the account balances at the date of the cash flows? If not then you have to use IRR as TWR requires balances at the time of cash flows.

This post has been edited by aronteh: Feb 5 2013, 02:02 PM


Attached File(s)
 XIRR_TWRR_sample.xls.zip ( 8.15k ) Number of downloads: 62

I hate dividend. Waste of time and money when come to UT. Purely marketing gimmick.