BackAlpha
Understanding XIRR: Accurately Measuring DCA Returns
Published May 26, 2025
When you invest the same amount of money every month ā a strategy known as Dollar Cost Averaging (DCA) ā calculating your annual return isn't as simple as comparing the start and end values. That's where XIRR comes in.
What Is XIRR and Why It Matters
XIRR, or Extended Internal Rate of Return, is a financial function that computes the annualized rate at which a series of irregular cash flows (such as monthly investments) grows to a final value. It's designed for real-world investing where money is added over time.
This makes it ideal for evaluating DCA strategies, where each deposit is made on a different date and held for a different length of time.
How XIRR Works
Mathematically, XIRR solves for r in the following equation:
0 = CFā / (1 + r)^(dā/365) + CFā / (1 + r)^(dā/365) + ... + CFā / (1 + r)^(dā/365)
Where each CFā is a cash flow (usually negative for investments, positive for final value), and dā is the number of days from the first cash flow.
Why Total Gain Isn't Enough
Suppose you invest $1,000 per month for three years. If your final portfolio is worth $44,170, your total gain on $36,000 invested is 22.3%. But that doesn't account for the timing of your deposits ā early investments had more time to grow than recent ones.
Simply dividing gain by invested capital ignores the time value of money and can mislead investors into thinking the performance was better (or worse) than it truly was.
How BackAlpha Uses XIRR
Every DCA strategy page on BackAlpha includes an XIRR-based annualized return. This gives a clearer picture of how your money truly performed, based on when each contribution was made.
- Accounts for irregular cash flows over time
- Captures compound growth effect realistically
- Better than simple gain or CAGR for DCA
Explore It Yourself
Want to see how your strategy would have performed? Visit the Dollar Cost Averaging strategy page to explore real results using XIRR for annual returns.