Simple Calculations to Determine Return on Your Investments

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Have you calculated the return on your stock or portfolio lately, and more importantly, have you calculated its return in a meaningful way? Several calculations will give you an idea of how an investment is doing. Some are more complicated than others are, but none are beyond the reach of the average investor who has a calculator. Here are several calculations you can use to help you understand how your investments are doing.

Total Return

It is a simple calculation, but it reminds us that we need to include dividends (where appropriate) when figuring the return of a stock. Here is the formula:

(Value of investment at the end of the year — Value of investment at beginning of the year) + Dividends ÷ Value of investment at beginning of the year

For example, if you bought a stock for $7,543 and it is now worth $8,876, you have an unrealized gain of $1,333. Assuming that you received dividends during this time of $350, you could find your total return using the following steps:

  1. ($8,876 - $7,543) + $350 ÷ $7,543
  2. $1,333 + $350 ÷ $7,543
  3. $1,683 ÷ $7,543

In this scenario, the total return would be 0.2231 or 22.31%. You can use this calculation for any period, which is a weakness since it doesn’t take into account the value of money over time.

Simple Return

Simple return is similar to total return; however, it is used to calculate your return on an investment after you have sold it. You can find your simple return by using the following formula:

(Net Proceeds + Dividends) ÷ Cost Basis – 1

Let's assume that you bought a stock for $3,000 and paid a $12 commission. Your cost basis would be $3,012. If you sell the stock for $4,000 (with another $12 commission), your net proceeds would be $3,988. Assuming your dividends amounted to $126, you could find out your simple return using the following steps:

  1. $3,988 + $126 ÷ $3,012 – 1
  2. $4,114 ÷ $3,012 – 1
  3. 1.36 – 1

In this scenario, the simple return would be 0.36 or 36%. Like the total return calculation, the simple return tells you nothing about how long the investment was held. If you want to see after-tax returns, simply substitute net proceeds after taxes for the first variable and use an after-tax dividend number.

Compound Annual Growth Rate

For investments held more than one year, you may want to look at this more sophisticated, yet not much more complicated calculation. The compound annual growth rate shows you the value of money in your investment over time. A 40% return over two years is great, but a 40 percent return over 10 years leaves much to be desired. Think of this calculation as the growth rate that takes you from the initial investment value to the ending investment value, presuming that the investment has been compounding over the period.

To calculate the compound annual growth rate, divide the value of an investment at the end of the period by its value at the beginning of that period. Take that result and raise it to the power of one, divide it by the period length, and then subtract one from that result.