Most people invest for a simple reason: to grow their money faster than saving alone allows. But higher returns never come free. Every investment asks you to accept some risk — and the more you hope to earn, the more you're likely to take on.
The Sharpe ratio helps you weigh that trade. It shows how much excess return you're getting for each unit of risk — helping you judge not just what you're earning, but how wisely you're earning it.
For every unit of risk, you want at least a unit of reward. That's what a Sharpe ratio of 1.0 represents — a baseline where the return is justifiable given the volatility. Fall short, and the investment might not be worth the effort or the stress. Beat it consistently, and you may be onto something special.
Used wisely, it helps you distinguish skill from luck, smooth performance from erratic gains — and can help flag investments that may look good on paper, but don't fairly compensate you for the risks involved.
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Quantifies risk efficiency:
Shows how much excess return you're earning per unit of volatility.
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Standardises comparisons:
Useful for comparing funds or portfolios with different risk levels or return profiles.
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Supports better decisions:
Helps prevent investors chasing high returns without understanding risk exposure.
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Depends on assumptions:
The result can vary depending on which “risk-free rate” and time period you use.
A high Sharpe ratio doesn't guarantee future performance — markets change.
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Assumes normal returns:
It works best when returns follow a normal distribution — which may not hold in real-world volatility.
1. What do we mean by returns?
On the surface, a return seems simple: you invest money, and at some point in the future, you have more (or less) than you started with.
But beneath the surface, “return” is not just one number. It’s a constructed measure — a way of answering the question:
How well did this investment perform?
Before we calculate anything, we need to decide what we’re trying to measure.
Are we capturing the total gain, or the average annual growth?
Should we include just the change in price, or also income like dividends or interest?
Are we reporting a raw number, or comparing it to a benchmark?
What about the risks taken to get there — or the costs involved along the way, such as trading fees or tax?
Every return metric answers a different question. And if you want useful answers, you first need to ask the right question.
Depending on which of these factors we include — and how we treat their timing — we may arrive at very different measures of return.
That’s why return is never purely objective. It reflects a set of assumptions about what matters, who it matters to, and how precisely we want to model reality.
| Component |
What it reflects |
| Capital gains |
The change in value of the asset itself — from buying to selling. |
| Income |
Dividends, interest, or rental payments received during the holding period. |
| Time |
How long your money was invested — and when the gains or losses occurred. |
| Cash flow behaviour |
Whether you added money, withdrew funds, or rebalanced your portfolio over time. |
| Risk exposure |
The level and volatility of risk you were exposed to while invested. |
| Costs and friction |
Fees, taxes, trading costs, and other frictions that reduce the net outcome. |
2. Why return matters
The return you earn — and how you choose to measure it — directly influences your financial decisions.
It affects how you evaluate investments, whether you switch strategies, increase contributions, or stick with your plan.
Misunderstanding your return can lead to poor timing, false confidence, or unnecessary changes.
Take a fund that advertises a 10% annual return. If you invested just before a market downturn, or added money during a volatile period, your personal return may be much lower.
This disconnect between reported performance and actual experience is at the heart of the
behaviour gap.
3. Dofferent options
There’s no single way to calculate an investment return — and the method you use shapes the story your results tell. Whether you're tracking your own progress or comparing managers, choosing the right return metric is essential to avoid misleading conclusions.
Also known as internal rate of return (IRR), the money-weighted return reflects your actual experience. It takes account of when you added or withdrew money and how those decisions influenced your outcome.
MWRR is especially useful for assessing personal portfolios or private investments where cash flows vary over time.
MWRR gives you insight into how *you* performed — not just the fund. Two people in the same investment can have very different MWRRs depending on when they bought, sold, or topped up.
It’s the only return metric that captures real investor behaviour and cash flow timing.
LINK out to MWRR guide
The time-weighted return removes the effect of cash flows to isolate how the underlying investments performed. It’s ideal for comparing fund managers or strategies, since it shows performance independent of investor timing decisions.
LINK out to MWRR guide
CAGR shows the annualised rate of return over a period, assuming a single lump-sum investment and no further cash flows. It’s simple and intuitive, but doesn’t account for timing or volatility — so it’s best used for quick comparisons or headline figures.
For example, if your portfolio returned 8% per year on average (TWRR), but your personal return was only 5% (MWRR), the gap isn’t from the market — it’s from behaviour. This is known as the
behaviour gap.
Studies by Morningstar and DALBAR show that the average investor tends to underperform their own investments — not because the assets perform poorly, but because of poor timing, switching decisions, and emotional responses to market moves.
LINK out to CAGR guide
| Metric |
Best for |
Considers cash flows? |
Typical use case |
| Money-weighted return (MWRR) |
Personal experience |
✅ Yes |
Evaluating your portfolio, IRR in private equity or property |
| Time-weighted return (TWRR) |
Strategy performance |
❌ No |
Comparing fund managers or index trackers |
| Compound annual growth rate (CAGR) |
Simple long-term growth |
❌ No |
Quick comparisons or marketing figures |
You can explore how different methods work — including deeper pros, cons, and when to use them — in our full explainer:
Calculating investment performance: different approaches.
If you want to measure:
- Your personal performance: Use MWRR
- A manager’s or fund’s skill: Use TWRR
- Simple annual growth: Use CAGR
This guide focuses on
money-weighted return (MWRR), because it reflects your actual experience as an investor — not just how the investments performed, but how you used them.
3. Choosing the right return method: MWRR
There’s no single way to calculate an investment return — and the method you use shapes the story your results tell. Whether you're tracking your own progress or comparing managers, choosing the right return metric is essential to avoid misleading conclusions.
Also known as internal rate of return (IRR), the money-weighted return reflects your actual experience. It takes account of when you added or withdrew money and how those decisions influenced your outcome.
MWRR is especially useful for assessing personal portfolios or private investments where cash flows vary over time.
MWRR gives you insight into how *you* performed — not just the fund. Two people in the same investment can have very different MWRRs depending on when they bought, sold, or topped up.
It’s the only return metric that captures real investor behaviour and cash flow timing.
LINK out to MWRR guide
5. Why cash flows matter
Two investors can put money into the same fund — and still end up with different returns. Why? Because cash flowsCash flows refer to the timing and size of money added to or withdrawn from your investments. shape your personal investment journey. When and how you invest plays a major role in what you actually earn.
That’s why money-weighted return (MWRR) is so important. Unlike time-weighted or compound returns, it captures the effect of your decisions — when you invested, how much, and whether you added at highs or lows.
- It affects your experience: – Investing more after a market rally means your average purchase price is higher — and your real return may be lower than headline figures suggest.
- It affects your outcomes: – Poorly timed contributions (like adding before a downturn) can drag down your personal return, even if the fund performed well overall.
- It affects comparisons: – Two people with the same fund can see very different results if their contribution patterns differ.
- It affects your strategy: – Knowing how your cash flows impact returns helps you plan smarter — automating contributions, rebalancing, and staying consistent.
That’s why this guide uses money-weighted return (MWRR) by default. It doesn’t just show how the fund did — it shows how you did.
6. The money-weighted return (MWRR) formula
The money-weighted return (MWRR) shows your personal investment performance — based on when you added or withdrew money.
It accounts for both cash flow timing and ending value, making it the most relevant measure for individual investors.
In technical terms, MWRR is the internal rate of return (IRR) that sets the net present value of all cash flows — including your final portfolio value — to zero.
But don’t let that intimidate you. It’s just the return that makes your investment timeline “add up”.
Formula: There’s no simple expression like with the Sharpe ratio, but conceptually:
Where:
MWRR = Your money-weighted return (MWRR or IRR)
Cash Flowt = Each investment, withdrawal, or final value at time t
t = Time from start (in years or months)
This formula is usually solved by spreadsheet or calculator, but the principle is simple: your MWRR is the return that links your actual inflows and outflows to your final result.
7. Interpreting MWRR
The money-weighted return (MWRR) tells you how your portfolio actually performed — taking into account your real cash flows.
It reflects your personal investment experience, not just market performance. That makes it one of the most honest, behaviourally relevant metrics in investing.
Think of MWRR as your *lifetime portfolio report card*.
It shows how well you deployed your money, not just how well the markets did. Two people can invest in the same fund and end up with very different MWRRs depending on when they contributed or withdrew.
MWRR isn’t compared to a fixed scale like Sharpe — it’s interpreted relative to your goals, behaviour, and benchmarks.
Shoulw we talk about IRR?
Like any metric, MWRR needs context to be meaningful:
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Investment behaviour – Did you chase performance or stay disciplined during downturns?
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Cash flow timing – Contributions made during peaks tend to drag returns down; dips often create opportunity.
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Personal benchmarks – Your goal may be 4–5% real return, even if markets returned 10%. Context makes comparison useful.
8. MWRR in action: worked example
Let’s compare two investors in the same fund. The fund itself delivers a steady 7% return each year — but their money-weighted returns (MWRRs) tell a very different story, all because of when they added or withdrew money.
| Year |
Fund return |
Investor A |
Investor B |
| 1 | 7.0% | Invests £10,000 | – |
| 2 | 7.0% | – | Invests £10,000 |
| 3 | 7.0% | Adds £10,000 | – |
| 4 | 7.0% | – | Withdraws £5,000 |
| 5 | 7.0% | Withdraws all | Withdraws all |
| MWRR | 7.0% | 8.3% | 4.9% |
Both investors chose the same fund, and both held it for five years. But their MWRRs diverged because of when they moved their money in and out.
Investor A added money early — and benefited from more time in the market. Their MWRR was actually higher than the fund’s published return.
Investor B did the opposite: they invested late, then withdrew during a drawdown. Despite the fund doing fine, their personal return (MWRR) lagged significantly behind — a classic case of performance drag caused by poor timing.
- Investor A: Front-loaded contributions. MWRR outperforms benchmark thanks to early compounding.
- Investor B: Late entry and mid-cycle exit. MWRR suffers despite same fund performance.
- Fund benchmark: Clean 7% return — but that’s not what most real-world investors experience.
The money-weighted return shows the true effect of your behaviour: when you invest matters just as much as what you invest in.
That’s why two people can earn wildly different results from the same fund. MWRR gives you a personalised view of how well your actual cashflow decisions performed — and how closely you stayed aligned with your goals.
9. Strengths and limitations
The money-weighted rate of return (MWRR) is powerful because it reflects your actual experience as an investor — not just what the fund earned, but what you earned.
It connects performance directly to your personal timing and behaviour. But like any measure, it has strengths and trade-offs:
For broader evaluation, many professionals also look at complementary metrics such as
time-weighted return (to isolate manager skill),
Sharpe ratio (to adjust for volatility), or
IRR (used in private equity and multi-stage cashflows).
Strengths
- ✓ Reflects real investor experience — it accounts for timing of all contributions and withdrawals.
- ✓ Easy to understand: the result is a personal rate of return, just like a bank account or savings product.
- ✓ Excellent for goal-based planning — shows whether your money actually grew as intended.
- ✓ Useful in behavioural analysis — helps identify the impact of investor decisions on outcomes.
- ✓ Makes sense in real-world terms — especially for lump sums, DCA strategies, or irregular cashflows.
Limitations
- ✗ Heavily influenced by timing — a single poorly timed trade can distort the result.
- ✗ Not suitable for comparing fund managers — doesn’t separate manager skill from investor behaviour.
- ✗ Different investors in the same fund can have wildly different MWRRs — making benchmarking harder.
- ✗ Not scale-invariant — results vary based on size and timing of contributions.
- ✗ Can be gamed in marketing by selectively including/excluding certain flows or timeframes.
- ✗ Less widely used in professional performance reports than TWRR or IRR.
10. Comparing your return to benchmarks or goals
So you've calculated your personal return — say, 5%. But is that good?
A number alone means little unless you compare it to something. That "something" could be inflation, interest rates, the market, or your own financial goals.
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Inflation: Did your money grow faster than prices? Beating inflation means your purchasing power increased.
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Interest rates: How does your return compare to a savings account or government bond? If not much better, you may be taking unnecessary risk.
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Market benchmarks: Indexes like the FTSE 100 or S&P 500 offer a baseline for diversified, passive investing. Did your performance exceed or lag the market?
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Your own goals: Are you on track to buy a home, retire, or build a safety net? The most meaningful benchmark is often personal.
A 5% return might be strong in a low-inflation year, or underwhelming during a market boom. Context is everything.
11. How to improve your personal return
Your money-weighted return reflects not just what you invested in — but how you invested. Behaviour, fees, and timing all play a role.
Fortunately, there are ways to improve your outcomes without needing to predict markets.
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Invest consistently: Regular investing (e.g. monthly contributions) helps smooth out market fluctuations and avoids poor timing.
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Reduce fees: Lower-cost funds and platforms leave more of your returns in your pocket. Fees compound in reverse.
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Avoid poor timing: Buying high and selling low harms returns. Staying invested during downturns often leads to better long-term outcomes.
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Use Optimly’s guides and tools: Explore our content on
saving and
investing strategies to boost your long-term results.
Improving your return doesn’t mean chasing hot stocks — it often means improving your habits.
12. Interactive calculator
Use this tool to calculate your money-weighted rate of return (MWRR) — a measure of how your actual investment behaviour influenced your portfolio’s performance over time.
Select how many cash flow periods you want to include. Then enter the date and amount of each investment or withdrawal. Don’t forget to enter the final portfolio value as your last row.
Enter your cash flows and dates to calculate your personal return. The MWRR reflects your actual experience, taking into account when and how much you invested.