Understanding IRR and MOIC: the importance of time

— 2 minutes read




Investors often grapple with various metrics to evaluate the performance of their investments. Two crucial metrics are IRR (Internal Rate of Return) and the total return, MOIC (Multiple on Invested Capital). Understanding these can significantly impact investment decisions, particularly when it comes to factoring in the element of time.


What is IRR?


IRR (Internal Rate of Return) measures the annual growth rate of an investment. It considers both the size and timing of cash flows, providing a comprehensive view of how quickly an investment is growing. Essentially, IRR answers the question: "At what rate is my investment compounding each year?"


What is the Total Return or MOIC?


MOIC (Multiple on Invested Capital) is a simpler metric that tells you how much your initial investment has multiplied. If you invest €1,000 and end up with €3,000, your MOIC is 3x. It does not, however, take into account the time it took to achieve this growth.


Comparing IRR and Total Return


While IRR provides insight into the efficiency and speed of an investment, total return (or MOIC) shows the absolute gain. Both metrics are essential:

IRR (speed of return):

  • Useful for understanding how quickly you get your money back and can reinvest.
  • Important for comparing investments of different durations.

Total Return/MOIC (magnitude of return):

  • Reflects the overall success of an investment.
  • Important for long-term wealth building.

The 10/10/10 Rule


We always recommend our investors follow the 10/10/10 rule: invest only 10% of your savings that you can set aside for the next 10 years, in at least 10 different companies. This approach helps spread your risk and increases your chances of finding successful investments. Diversification mitigates the risk of any single investment performing poorly.


Conclusion


While IRR is invaluable for assessing how quickly you receive returns, it's essential also to consider the total return. Sometimes, waiting for a larger return over a longer period is better than rushing for smaller, quicker returns. Understanding both IRR and total return helps in making more informed and balanced investment decisions.

As a crowdfunding platform, we believe in educating our investors and helping them make informed choices. By following the 10/10/10 rule and considering both IRR and total return, you can build a more robust and diversified investment portfolio. This balanced approach ensures that you not only grow your wealth but do so efficiently and with managed risk.