Calculating An Investment's Internal Rate Of Return

Computing your return on investment is not necessarily the best way to keep track of how your portfolio is performing. By using the internal rate of return, you can stay on top of cash flows in and out of your portfolio.

- Paul Leonard

You may have heard of a return on investment, but have you ever heard of an investment measure called the internal rate of return? The return on investment (ROI) –sometimes called the rate of return (ROR) – is the percentage that an investment has increased or decreased over a certain period of time. By contrast, the internal rate of return (IRR) measures the actual return achieved by an investor’s money in a portfolio.

The IRR calculation takes all fees, the time of investment, additional investments and withdrawals into account and then calculates the growth of the investment in a meaningful way.

This then enables an investor to determine whether their portfolio is on track to achieve the return required for them to meet their lifestyle objectives.

The IRR calculation looks at a portfolio’s return on an annualised (in other words on a per year) basis. If, for example, you had R100 on 1 January and R110 on 31 December and made no deposits or withdrawals, your IRR would be 10% for the period.