CAGR, IRR, and TWRR: Investment Returns Explained
The same portfolio can post a 7%, 10% and 12% return on the same day. None of them is wrong. Picking the wrong one is how amateur investors decide their fund manager is a genius.
Same portfolio, four returns measures
Worked example: £200/month into S&P 500, 2000-2025. Pick the wrong metric, draw the wrong conclusion.
Which return metric to use
| Question | Use |
|---|---|
| How did the S&P 500 do over 20 years? | CAGR |
| How did my monthly investing actually perform? | IRR |
| Did my fund manager beat the benchmark? | TWRR |
| What was my total profit? | Total return |
| Almost any honest question | Not AAR |
For most UK ISA/SIPP investors, IRR is the number that tells the truth.
Key takeaways
CAGR (Compound Annual Growth Rate) tells you the smoothed annual return of a lump sum investment over a period. Simple and useful, but it ignores the timing and size of contributions.
IRR (Internal Rate of Return) accounts for when you put money in and took it out. It is the most honest measure of how your actual money performed.
TWRR (Time-Weighted Rate of Return) strips out the effect of cash flows and measures the fund itself. Fund managers report TWRR because it isolates their decisions from yours.