Work out the average annual return of an account from its deposits, withdrawals, and dates — or the average and cumulative return across a series of investment returns.
Estimates the average annual return of an entire account from its starting and ending balances plus any deposits or withdrawals in between.
Estimates the average annual return and cumulative return across a series of individual returns, each held for its own length of time.
Comparing a starting balance to an ending balance tells you almost nothing about performance if money moved in or out along the way — a big deposit right before a rally can make mediocre performance look great, and a withdrawal at the wrong time can make good performance look bad. Accounting for the exact size and timing of each cash flow (the same principle behind XIRR) isolates the account's actual rate of return from the effect of when you happened to add or remove money.
A simple average of several yearly returns overstates real performance, because it ignores compounding and the fact that a loss needs a proportionally larger gain to recover from. A -50% year followed by a +50% year isn't break-even — it's a 25% loss overall. This calculator's "average return" is the single constant annual rate that, compounded over the same total holding period, would produce the identical cumulative result — the only mathematically honest way to average returns over time.
The first works from real account activity — actual dollar amounts and dates. The second works from a series of already-known period returns (like "up 10% this year, down 2% the next") and their individual holding lengths, without needing dollar amounts at all.
Because it has less time to be affected by the account's growth or decline — the calculator weighs each cash flow by how long it was actually invested, not just how large it was.
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