How to Calculate Investment Performance: Portfolio Return Methods Explained

Investment performance measurement is how you turn raw price changes, dividends, fees and cash flows into a single Rate of Return (RoR) you can act on. The right method lets you compare assets, evaluate strategies, judge a manager and plan your financial future. The wrong one — or the wrong assumptions — can make a losing portfolio look like a winner. This guide covers the four core RoR methods that matter for personal investors — ROI, CAGR, TWR, and MWR (also called IRR, MWRR, Dollar-Weighted Return or Personal Rate of Return) — with formulas, worked examples, and a decision table for picking the right one.

This article explores each method in turn, then covers the factors that change your bottom line — fees, taxes, inflation, FX. Whether you do the math yourself or use a portfolio tracker, you'll understand what's behind the numbers and when it's best to use them.

It's pretty long and in-depth, so feel free to jump between sections in any order. There's no story here, just knowledge and formulas :)

TL,DR;

For personal investments, you can use the following rate of return calculation methods:

Single asset: ROI vs CAGR

• ROI to get a simple return over time
• CAGR to get average return per year

More than one asset: Money Weighted vs Time Weighted Return

• MWR to get the whole picture (your personal rate of return)
• TWR to see how your asset choice was performing

👉 Whenever you can, use Total MWR/IRR as it's the best metric for individuals and works in most scenarios 👈

Quick comparison: ROI vs CAGR vs TWR vs MWR/IRR

Simple Return on Investment (ROI)

Return on Investment (ROI) is the simplest rate of return — the total percentage gain on the money you put in. It's the headline number you see in most "I bought X for $A, sold for $B" stories. Simple ROI tells you how much you've gained compared to what you've invested over time, without adjusting for when the money went in or out.

What is the ROI formula?

The ROI formula is:

Where:

• All Revenue is the total amount received from selling assets or receiving dividends.
• Current Value is the current market value of your open positions.
• All Expenses is the total amount spent on acquiring assets.
• Starting Value is the value of your portfolio at the beginning of the evaluation period.

Simple ROI is best used when you evaluate a single position and don't reinvest dividends or make changes over time.

For example, let's say you invested $10,000 in a stock at the beginning of the year, and by the end of the year, your investment is worth $12,000. Using the Simple ROI formula, your return would be:

Portfolio with cash flows

However, Simple ROI has many limitations. It disregards the timing of your cash flows and will double-count the same amount of money if you sell an asset to buy a different one.

Consider the following scenario: You initially invest $10,000 in Stock A, which grows to $12,000. You then sell Stock A and use that $12,000 to buy Stock B. By the end of the year, Stock B is worth $14,000. The Simple ROI calculation would be:

This result is misleading because it counts the $10,000 used to buy Stock A twice. The real gain should be based on the initial $10,000 investment growing to $14,000, which would be:

But to know that, you need to track where the money originated from. For example, by including only the money you've transferred in & out of the portfolio.

If you would not sell the Stock A, but only buy $10,000 more of it, then your gain from the initial buy would be slashed in half, as you have $22,000 of current value and $20,000 of inflows

Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR) is the steady annualized return that would take you from your starting value to your ending value, assuming all gains are reinvested. Unlike Simple ROI, which gives you a total return, CAGR captures the compounding effect over time — it's effectively an annualized Return on Investment.

CAGR is not the same as a simple "average annual return". An average treats every year independently and is easily skewed by a single big year; CAGR is a geometric mean that reflects how money actually compounds.

What is the CAGR formula?

Where:

• Ending Value is the value of your investment at the end of the period.
• Beginning Value is the value of your investment at the start of the period.
• n is the number of years between the beginning and end of the period.

How do you calculate the annual Rate of Return?

If you already have RoR calculated, you can annualize it with the following formula:

When annualizing periods counted in days not years, you can use this instead:

Time Weighted Rate of Return (TWR)

Time-Weighted Return (TWR), also written TWRR (Time-Weighted Rate of Return), is the rate of return on the assets themselves — it strips out the effect of when you added or withdrew money, so it reflects manager or strategy skill rather than your timing. This makes TWR useful for evaluating an investment strategy because it shows the returns from the assets alone, without considering when or how much money was added or removed.

It's also why TWR is the standard strategy-comparison return in many professional reports. Under the GIPS (Global Investment Performance Standards), firms that claim compliance generally use TWR for comparable portfolio results, although GIPS allows MWR in specific cases such as some closed-end, fixed-life, fixed-commitment or illiquid strategies.

What is the TWR formula? (How to calculate TWR)

1. Divide the Period: Split the total evaluation period into smaller sub-periods based on when cash inflows or outflows occurred.
2. Calculate Sub-period Returns: For each sub-period, use the formula:Rn = (Ending Value - (Beginning Value + Cash Flow)) / (Beginning Value + Cash Flow)
   • R1, R2, ..., Rn: Return for each sub-period.
   • Ending Value: Portfolio value at the end of the sub-period.
   • Beginning Value: Portfolio value at the start of the sub-period.
   • Cash Flow: Net cash added or removed during the sub-period.
   🦉

   Cashflows at the beginning or end of period

   The above formula assumes that the cash flow happens at the beginning of the period, meaning you buy the asset and then observe its growth by the end of the period.

   However, if the cash flow happens at the end of the period, the formula changes to:

   Rn = (Ending Value - Cash Flow - Beginning Value) / Beginning Value

3. Link Sub-period Returns: Combine the result from each sub-period using this formula:TWR = [(1 + R1) * (1 + R2) ... * (1 + Rn)] - 1
   🦉

   TWR < -100% when cash flow is bigger than value

   Including fees in cash flows can make your Time-Weighted Return (TWR) negative. If your investment grows afterward, the TWR can drop even more due to the geometric link between periods.

   To fix this, restart the TWR calculation whenever Rn goes below 0, treating it as a new initial investment. Present the resulting rates separately or add them together.

How to include dividends in TWR calculation?

Dividends are a key part of the returns from an asset. By including them in cash flows, we remove their effect from TWR. To include them in returns, adjust the ending value by the amount of received dividends. The formula for a sub-period would be:

You can do the same for fees by subtracting them from the ending value.

How to handle discounts and fees when calculating TWR?

Sometimes you might buy or sell the asset at a discount or premium, for example when exercising stock options. This includes any fees you might pay as well. Using this value as Cash Flow will reflect them in the return. To completely remove this impact, you can use Market Price * Quantity for the cashflow - the market value that flows in or out instead. In other words:

TWR vs IRR (TWR vs MWR): which one is right?

TWR and MWR/IRR answer two different questions about the same portfolio. TWR asks: "how did the assets perform?" while MWR/IRR asks: "how did I perform as an investor?" When you don't add or remove money, the two numbers match. As soon as you start dollar-cost averaging, taking profits, or making large deposits during volatile periods, they diverge — and the gap is the impact of your timing.

Quick example: imagine an asset goes -50% in year 1 and +100% in year 2. The TWR over the two years is 0% ((1 - 0.5) * (1 + 1) - 1 = 0). But if you put $1,000 in at the start of year 1 and another $1,000 at the start of year 2 (right after the crash), your MWR/IRR is strongly positive (~30%) — your timing earned real money on top of the asset's flat return. Conversely, bad timing — like withdrawing at a low point or piling money in just before a drop — would pull your MWR below the TWR.

Rule of thumb: TWR is the strategy-comparison number. Funds and managers commonly use it to show asset or manager performance, especially in GIPS-style reporting, because it lets portfolios be compared like-for-like. Broker account views may instead show MWR/Personal Rate of Return, TWR, or both depending on the product. MWR/IRR is what you actually earned, and it's what tools like Capitally show alongside TWR so you can see exactly how much your decisions added or subtracted vs. the underlying assets.

Money Weighted Rate of Return (MWR) / Internal Rate of Return (IRR)

Money-Weighted Return (MWR) — also called Internal Rate of Return (IRR), MWRR, Dollar-Weighted Return, or Personal Rate of Return — is the single annualized rate at which all your cash flows discount to today's portfolio value. It's the return you actually earned, taking into account the timing and size of every deposit, withdrawal and reinvestment.

Imagine you have a deposit account. You transfer the same amount of money in or out whenever you buy or sell an asset in your investment portfolio. MWR is the fixed interest rate this hypothetical account would need to match your actual investment performance — which is why it's the metric that most closely answers "how am I doing?".

Most of the time, MWR/IRR is annualized, which means it represents the average annual return over the investment period. Annualized MWR is particularly useful for comparing investments over longer periods or with different holding periods.

Money Weighted Return calculation example (XIRR)

Calculating MWR is not easy and requires trial-and-error to do it accurately. It's not something you would do by hand, but spreadsheet programs like Excel and Google Sheets have a function called XIRR (Extended Internal Rate of Return). To use it, you need:

• a table of your cash flows and their dates
• include the value of your assets at the beginning of the period in the cash flows of the first day (as if you bought them that day at the date's market price)
• include the value of your assets at the end of the period in the cash flows of the last day (as if you sold them that day at market price).

By default, XIRR returns an annualized rate, which is why MWR/IRR figures are often compared on a per-year basis. Plain spreadsheet IRR, however, returns a rate per cash-flow period; monthly cash flows produce a monthly IRR, annual cash flows produce an annual IRR. If you need a non-annualized return for a short period, pair MWR with a simple ROI for that same period.

Modified Dietz method (the brokerage shortcut)

Some brokerages and portfolio platforms use the Modified Dietz method instead of true XIRR. Modified Dietz is a closed-form approximation of MWR that weights each cash flow by the fraction of the period it was invested, so it is faster and easier to explain in account statements.

Where CF_i is each cash flow and W_i is the fraction of the period remaining after that cash flow occurred. It's fast and good enough for low-volatility portfolios with small cash flows. It loses accuracy when there are large mid-period flows or sharp swings between deposits — exactly the cases where a true XIRR-based MWR is most informative. Use XIRR for accuracy, Modified Dietz for speed — and be aware which one your tool reports.

When to use MWR?

MWR/IRR is usually the most useful calculation method for personal portfolios (i.e. tracking your own investments rather than benchmarking a manager). It enables you to assess your performance as an investor, because it takes into account how your actions — when you bought, sold, deposited or withdrew — affected the returns, separately from the market.

By comparing MWR vs TWR you can see the impact of your timing, cash flows and fees. The bigger the difference between the two rates, the bigger the impact of your decisions. Just remember to compare like with like: TWR can be shown as a period return or annualized return, while XIRR-based MWR is annualized by default.

When you have a complex, highly volatile portfolio, it can be very hard or impossible to find a valid number. In those cases, the tools you use might give you a wrong result or no number at all (e.g., Excel will return an error).

In general, IRR is expensive to calculate and there are many different ways to do it. Each tool will use a different one, and some of them may give highly inaccurate results in suboptimal cases. When numbers from two different tools don't match, always check whether the dollar amount is roughly the same.

IRR vs ROI: what's the difference?

IRR and ROI differ in one key way: IRR considers the time your money was invested, while ROI does not. This difference is not necessarily good or bad.

In some cases, you may want to know your total gains from all the money invested over a period. For example, if you did Dollar Cost Averaging, you can compare Simple ROI to TWR to know what your results would be if you invested everything on day one.

However, most of the time, you need a number that allows you to compare investments realistically. For this purpose, IRR (or TWR) is the better choice.

What can affect your returns and how to track it?

When evaluating your investment performance, consider more than just the raw returns. Other factors can impact your bottom line and should be considered when making investment decisions.

Price Rate of Return

Price Return represents the simple increase or decrease in the value of your investments based on its price. It doesn't include any additional cash flows incurred or generated by the assets.

Nominal Rate of Return

Nominal Return includes the price movement and any regular income generated by the asset, like dividends, interest or rent. It is not adjusted for inflation, fees or taxes

Total Rate of Return

Total Return includes Price Return, dividends, interest, fees and any other expenses and revenues — everything that flowed into or out of your portfolio because of the investment.

Total return formula (period-based):

For multi-period returns with cash flows, plug those flows into a TWR or MWR calculation as described above.

After-tax Rate of Return

Taxes can have a substantial effect on your investment returns. You may be subject to various forms of taxation, depending on your jurisdiction and investment account type. They affect you at different stages:

• Taxes already paid or withheld by the broker
• Taxes on realized gains that you're due to pay in the future
• Potential taxes you would owe on unrealized gains - as if you had to liquidate all your holdings at current market value

After-tax Return typically includes the Tax Paid. If the tool can calculate your due taxes, it's best to include them as well, as they're your future liability.

Unrealized After-tax Return (or Potential After-tax Return) would include all three kinds of tax. It's good to know this number, because it keeps your returns close to reality. But as unrealized gains are only "on paper", you should definitely track them separately.

After-tax return formula (single period, simplified):

For accurate per-trade calculation, include each tax as a cash flow on its date:

• Add the Tax Paid as a negative cashflow when it occurs.
• Add the Tax Due and Unrealized Tax as negative cashflows at the end of the calculation period. Since they haven't been paid yet, they decrease your investment's current value.

Real Rate of Return

Real Rate of Return takes inflation into account and shows you the actual purchasing power of your investment gains — what your money will actually buy at the end of the period vs. the start.

Real rate of return formula (Fisher equation):

You can plug any nominal rate into this — total return, after-tax return, MWR, TWR, CAGR — to get the real version. For example, if your portfolio has a Total Return of 8% and the inflation rate is 2%, your real return is approximately 5.88% (1.08 / 1.02 - 1). Your investments grew by 8% on paper, but your purchasing power only increased by 5.9% after accounting for inflation.

Capital and Currency Return (FX-adjusted return)

If your portfolio has different currencies, it's good to see how currency exposure impacts your return — i.e. to split your currency-adjusted return into the part that came from the assets and the part that came from FX moves.

• Capital Return is the profit made from the assets in their original currencies. It excludes any effects from currency exchange rate changes.
• Currency Return is the profit or loss made solely from the changes in currency exchange rates. It excludes capital return.

To calculate both returns, follow these steps:

1. Choose a single Base Currency.
2. Calculate Total Return in the Base Currency. Convert all cash flows into the base currency using the FX rates from the dates the cash flows occurred. Then, calculate the total return as usual.
3. Calculate Capital Return. It's the same as Total Return, but you use the FX rate from a single day - ideally when each position was opened or the first day of the calculation period. Calculate the return based on these converted values.
4. Calculate Currency Return by subtracting the Capital Returns from the Total Returns. This will isolate the Currency Returns in the base currency.

This method works for both the Return amount ($) and the Rate of Return (%).

Calculating Portfolio Performance in Google Sheets - Practical example

Let's illustrate the differences between different methods of calculating investment returns. We have an example portfolio with the following transactions:

1. January 2020: Purchased Asset for $10,000.
2. January 2021: Our Asset is now worth $14,000. We sell 50% of it for $7,000 and keep the rest.
3. January 2022: Our Asset is now worth $10,000 (up from $7k). We buy $5,000 worth of the asset at a 20% discount, so we spend just $4,000 on it. We now have $15,000 worth of the Asset.
4. January 2023: Our Asset is now valued at just $10,000 (down from $15k) and we keep the position open.

Let's see what are the different rate of returns and how they’re calculated:

They’re pretty wildly different, right? Please note, that we start and end with $10,000, but we still have $3,000 in our pocket from the sale in 2021. This means, we have a 30% total return from our initial investment, ~9% annual, but none of the methods gave us that number!

Use the right tool for the job

When calculating investment returns, there's no one-size-fits-all method. Each calculation has its strengths and is suitable for different scenarios.

As a rule of thumb:

• Money Weighted Return (MWR) / Internal Rate of Return (IRR) is often the best choice to measure individual portfolio performance
• Time Weighted Return (TWR) is a great choice to compare investment strategies and different asset allocations
• Simple Return or CAGR are suitable for single positions or buy & hold portfolios with limited activity
• Include fees, taxes, and inflation to assess returns from your perspective, but do not use them when comparing with benchmarks. Unless you need to (de)motivate yourself ;)
• Whenever possible, choose a tool that allows you to check more than one kind of Rate of Return.

Many tools and investors commonly use inaccurate names for the figures they present, because terms like "CAGR" or "IRR" are shorter than "Annualized Total Money Weighted Return". Generally, you can assume the following:

• "Returns" usually refer to a simple Total ROI or CAGR, but can be anything really.
• "IRR" often means a variant of Total MWR, typically annualized, unless there is "IRR p.a." or "Annualized IRR" somewhere as well.
• Post-tax or Real returns are more complex and rarely seen, thus they are often described precisely. Otherwise, don't assume the return you see is adjusted for tax or inflation.

Frequently asked questions

Final words

You can calculate your returns yourself using spreadsheets. But remember that accurate calculation of RoR requires record-keeping of all cash flows. This is manageable with a few transactions but becomes complex and error-prone with higher trading activity.

ROI and CAGR are fool-proof, but can be used reliably only in a handful of scenarios and limited time frames.

I hope this article helps explain how to calculate investment performance. If you have any questions or comments, feel free to ask on our community forum.