Here is another good article on the crucial differences between various measures of "investment returns":

https://www.kitces.com/blog/twr-dwr-irr-calculations-performance-reporting-software-methodology-gips-compliance/"Consider the following scenario that we will use to highlight the different computation methods, using the fictitious ABC company.

On January 1st, you purchase 10,000 shares of ABC at $10 per share

Total investment of $100,000

Portfolio value is $100,000 (10,000 @ $10)

ABC grows to $20 per share by Jan 31

Portfolio value is $200,000 (10,000 @ $20)

You have made $100,000 in January

On February 1st, you purchase 10,000 shares at $20 per share

Cash flow of $200,000, total investment of $300,000

Portfolio value is $400,000 (20,000 @ $20)

On February 28th, ABC shares drop to $14

Portfolio value is $280,000 (20,000 @$14)

You have lost $120,000 in February.

You have lost $20,000 lifetime.

In this example, we purposely put the flows at the beginning of the month, so the monthly calculations would be a bit easier. In this scenario:

January: All 3 methods will yield the same thing. We started with $100,000, we ended with $200,000, and since there were no intervening cash flows we are up $100,000 on an investment of $100,000 and it’s all pure investment return, so we have a rate of return of 100%.

February: Since we put the flow at the beginning, all three methods will show the same result for the month of February. We started with $400,000 (since the contribution happened precisely at the beginning of the month), and ended with $280,000, which means we lost $120,000 and have a rate of return of -30%.

Year to Date: The monthly returns are easy to follow, but now let’s look at YTD:

Basic Rate of Return: The investor cumulatively invested $300,000 (which is $100,000 initially plus $200,000 in the second month), and lost $20,000 (which is $280,000 final value, minus $100,000 starting value, and $200,000 of cash flows), so the basic rate of return is -6.67%.

Time-Weighted Return: January was up 100%, while February was down 30%, which when time-linked gives us a rate of return of +40%.

IRR (Dollar-Weighted Return): The IRR calculation for this scenario is rate of return of -10.22%, which reflects the unfortunate fact that while the gain was 100% in January and the loss was “just” 30% in February, the loss receives a much higher weighting because the investor added dollars to the portfolio just before the loss and had far more invested (therefore, a higher dollar weighting) on the way down. (Notably, this IRR calculation is not the same as would be calculated in Excel, as the Excel IRR calculation assumes equal time periods and is annualized, whereas this example includes time periods with a slightly different number of days, and was only for 2 months and not a full year.)

ABC Company: Also worth noting is what the underlying company holding itself did. The ABC company started the year at 10 as now at 14, which means it is up 40% for the year. NOT coincidentally, this is the same return shown by the TWR (which is meant to represent the returns of the underlying portfolio, regardless of the investor’s cash flows in or out).

This scenario highlights some of the differences in the methods of computing performance. The IRR shows a larger loss than the basic rate of return. This is because the IRR accounts for the fact that the additional $200,000 contribution in February was participated in the market decline in February but not the gain in January (thus increasing the weighting of the February loss), whereas the basic does not make that distinction that part of the cash was only invested for the loss but not the gain. The IRR of -10.22% is a better indicator of the true performance than the basic, which is -6.67%."