IRR -- Internal Rate of Return

IRR is the rate at which discounting all cash flows -- deposits in, withdrawals and current value out -- yields a net present value of zero. In portfolio terms, it answers: what annualized return did I personally earn, given exactly when I put money in and took it out?

IRR vs. TTWROR

The key distinction:

• TTWROR strips out timing effects. It shows how a manager's decisions performed.
• IRR includes timing effects. It shows how an investor's experience played out.

If you made a large deposit just before a market crash, your IRR will be lower than TTWROR. If you had the fortune to deploy a large sum before a strong rally, your IRR will exceed TTWROR.

Annualized IRR

The IRR shown here is annualized -- sometimes called XIRR in spreadsheet applications -- which accounts for irregular cash flow timing rather than assuming end-of-period flows. This makes it directly comparable across portfolios of different ages and activity levels.

Interpreting IRR

A positive IRR above your cost of capital (or a relevant benchmark) indicates that the timing of your capital deployment added value relative to a passive strategy. A negative IRR, even with positive TTWROR, may indicate systematic mistiming -- deploying large amounts before drawdowns.