Internal Rate of Return (IRR)
IRR (also called XIRR when cash flows land on irregular dates) is the annualized rate of return that accounts for the actual size and timing of every dollar you put in or took out. Unlike TWR, IRR is personal — it answers "how well did my money actually do," not "how well did the investments do."
The math: IRR is the discount rate that makes the present value of all your cash flows (deposits as negative, withdrawals and final value as positive) equal to zero. It's typically solved iteratively, not with a simple formula.
Same example as TWR, different answer
Same portfolio: $10,000 on Jan 1, another $10,000 in June, ending value $21,000 on Dec 31.
TWR said +18.7% — the investments themselves did well. But IRR comes out lower, because the second $10,000 was only invested for the weaker second half of the year and had less time to benefit from the strong first-half performance. IRR correctly reflects that your capital, weighted by when it was actually deployed, earned less than the investment's own TWR suggests.
TWR said +18.7% — the investments themselves did well. But IRR comes out lower, because the second $10,000 was only invested for the weaker second half of the year and had less time to benefit from the strong first-half performance. IRR correctly reflects that your capital, weighted by when it was actually deployed, earned less than the investment's own TWR suggests.
Why it matters
IRR is the number to look at when deciding "was this actually a good use of my money" — it's sensitive to your own timing decisions, not just what the underlying assets did.
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