Return on Investments
How is your portfolio or stock doing? Have you calculated its return lately, and, more importantly, have you calculated its return in a meaningful way?
There are diverse calculations that 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 and a calculator.
Here are several calculations you can use to help you understand how your investments are doing. Total Return This is a brainless calculation, but it reminds us that we need to include dividends (where appropriate) when figuring the proceeds of a stock. Here is the technique:
(Value of investment at the consecutively a the worst of the year – Value of investment at beginning of the year) + Dividends / Value of investment at beginning of the year = Total Return
For you bought a stock for $7,543 and it is now worth $8,876, you have an unrealized gain of $1,333. You also received dividends during this time of $350. What is the absolute return?
($8,876 - $7,543) + $350 / $7,543 = Total Return
$1,333 + $350 / $7,543 = Total Return
$1,683 / $7,543 = Total Return
0.2231 or 22.31% = Total Return
You can use this calculation in the interest of any time days, which is a weakness since it doesn’t take into account the time value of money. Simple Return Simple amends is similar to total return, however it is used to calculate your advent on an investment after you have sold it.
Here is the MO:
Net Proceeds + Dividends / Cost Basis - 1
Let’s coordinate operate through an example. Suppose you bought a stock for $3,000 and paid a $12 commission. Your payment basis is $3,012. You sell the stock for $4,000 and there is another $12 commission, so your net proceeds are $3,988. Dividends amounted to $126.
$3,988 + $126 / $3,012 - 1 = Simple Return
$4,114 / $3,012 – 1 = Simple Return
1.36 – 1 = Simple Return
0.36 or 36% = Simple Return
Like the Total Return calculation, the Simple Return tells you nothing about how long the investment was held. If you call for 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 investment held more than one year, you may want to look at this more sophisticated, but not much more complicated calculation.
The Compound Annual Growth Rate shows you the time value of money in your investment. A 40 percent return over two years is clever, but a 40 percent return over and beyond ten years leaves much to be desired.
I devote a whole article on this important calculation. You can find it by clicking here. Conclusion Simple or slightly more complicated calculations can give you a better fix on how your investments are doing.
