Dollar-weighted return (IRR)
Principles of Finance glossary · Capital Budgeting
Definition
The internal rate of return on the time-stamped sequence of contributions to and withdrawals from a portfolio; also called money-weighted return. Sensitive to the timing of investor cash flows, so it measures investor experience rather than manager skill (contrast: time-weighted return).
Dollar-weighted return (IRR) in plain English
The dollar-weighted return measures how YOUR actual investing experience turned out, taking into account exactly when you put money in and pulled money out. It's the single interest rate that would make all your deposits and withdrawals balance out to your final account value — that's why it's also called the internal rate of return (IRR). Here's why timing matters: if you happened to pour in a big chunk of money right before the market soared, your dollar-weighted return looks great, and if you invested big right before a crash, it looks awful — even if the fund itself performed identically both times. Because it's swayed by the size and timing of when investors add cash, it captures the investor's real-life result rather than the fund manager's skill (for pure skill, you'd use the time-weighted return, which strips out cash-flow timing).
Also called: IRR
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