What is CAGR? And how does that compare to TWRR & MWRR? Isn’t it all just about the gains on your investment at the end of the day? How should you measure the performance of your portfolio?
We typically start out looking at the “profit” (or loss!) on our investments. We like to see that our portfolio is in the black. However, that isn’t enough. Being up 50% is always good. But it’s better if we’re up 50% in a fewer number of years.

CAGR (Compound Annual Growth Rate)
CAGR is one of the simplest measures of annual growth. You toss a bunch of money into the market & check its value after a few years. You use a little formula that tells you what the average annual growth rate was over that period. Your investment may have bounced up & down during that time, but CAGR gives you one easy number to look at. It’s a simple way to compare the historical performance of one investment against another. You can even calculate the CAGR of your house appreciation. Or you can use an online calculator like this one here. If you bought your house for $100k twenty years ago & it’s worth $300k today, your house appreciated at an annualised rate of about 5.6%. Now you can compare the returns on your house against your investments in the stock market!
But this only works for static investments. If you have cashflows, in or out, the numbers get thrown off & CAGR may not be so useful.

TWRR (Time Weighted Rate of Return)
TWRR & CAGR will be the same if there are no external cashflows, either into or out of the fund. In the real world, money is moving in & out of funds all the time. So fund managers & portfolio managers use some fancy math to calculate the TWRR to show the comparative performance of their ETFs. They use TWRR precisely because it eliminates the effects of the those cashflows. It’s trying to come up with a number that’s like CAGR, but for a portfolio that changes all the time. Because of this way of calculating return, TWRR makes it easy to compare funds against each other & against benchmarks. It only compares the performance of the investment choices. It doesn’t look at the return impact of funds flowing in & out.

MWRR (Money Weighted Rate of Return)
While TWRR eliminates the effects of inflows & outflows, MWRR deliberately looks at the impact of the size & timing of those cashflows. It wants to show the positive & negative impacts of when we add or remove money from a portfolio. The size & timing of the inflows & outflows means that the TWRR & MWRR percentage returns can be different. Sometimes significantly. An investor who moves money in or out will have an MWRR that is different from the TWRR for the same portfolio. If our investor times the market right & invests a large amount at a market low during the measurement period, his MWRR will be higher than his TWRR. And it should be, he got it right & made more money. That’s why it’s call Money-Weighted. The end value of his portfolio will be bigger as a result. The investor who sold some shares at the low is at the other end of the spectrum. He sold low, lost some money, & there was less money left in the portfolio to benefit from the recovery going forward. His MWRR will be much lower than the other guy. As will his end portfolio value. MWRR shows those differences on an annualised return basis. Since it’s removing the effects of cashflows, the TWRR for both investors will be exactly the same. But I know whose shoes I’d rather be in!

What does it all mean?
Remember that TWRR removes the influence of cashflows. It only shows the performance of the investment choices. In other words, both our investors made good investment choices (assuming they were beating the market!), but they managed their cashflows differently. And MWRR shows that difference in performance because of that cashflow management feature of the formula. The loser sold at the wrong time & had less value left in the account to benefit from the subsequent growth. His MWRR was lousy. The other guy bought more at the right time & he had even more money in play to capitalise on the growth that followed the market lows. His MWRR was great.
And no, it can’t help you time the market going forward. It just shows how well, or how poorly, your crystal ball worked in the past.
If no money moves in or out during the measurement period, CAGR, TWRR, & MWRR will all be the same.

About 6 years ago, the CSA (Canadian Securities Administrators) implemented guidelines for portfolio managers to provide performance reports based on MWRR for their clients. While fund managers need to use TWRR for real world comparison purposes, the MWRR is more real for individual investors. For DIY investors, some brokerages have performance tools that will show you both TWRR & MWRR over different timelines. When you are reviewing your performance, it might be good to know what kind of returns you’re looking at. Check out the performance tools on your brokerage account. Or, if you have an advisor managing your investments, talk to them about how your returns are reported.

Knowing the TWRR of your own portfolio is great for comparing the performance of your choices to that of an index fund or any other strategy ETF you think might be suitable for you. If you’re putting in hours of work & worry trying to beat the market, this metric might help you decide if it’s been worth all the extra effort. If you sat on some cash in the past, maybe waiting for an opportune crash to invest, the MWRR may help you see how well (or poorly) the timing of your money decisions worked in the past.
On the other hand, if you are happy with your portfolio’s TWRR & are investing small amounts regularly, you probably don’t need to worry about the MWRR deviating too much from that.

Of course, these are just a few ways of comparing performance. When it comes to investing, we all have our behavioural characteristics too. It might not be that we want to chase the highest return. There are investors who will sacrifice some growth in favour of lower volatility. Some favour investments that throw off dividends & distributions. We all have different tolerance levels for fixed income investments. And so on. But knowing the TWRR & MWRR on a portfolio can add something to the evaluation mix for us too.

If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.