How to calculate the return on your investment(Read article summary)
Despite files — or email folders — full of investment statements and reports, you still may not really be sure how much your money is growing. However, there is a simple way to get a quick idea of how a particular investment is doing.
Despite files — or email folders — full of investment statements and reports, you still may not really be sure how much your money is growing. You can see the total in a statement, but the actual profit — your “return on investment,” or ROI — isn’t as clear. However, there is a simple way to get a quick idea of how a particular investment is doing.
In many cases, you can calculate your ROI on your own. Keep in mind that this technique is a simplified, back-of-the-envelope calculation, but it gives you a good idea of how much or how little your investment has returned. You can do this calculation with any investment you have, though it will be imprecise if you don’t know the associated fees.
Here’s how to calculate your return on investment: You take the amount you made on your investment (the gain) and from it you subtract what you paid for the investment (the cost). Then you divide the result by the cost.
ROI = (Gain from Investment – Cost of Investment)/(Cost of Investment)
So, if you buy 100 shares of a stock at $30, your cost is $30 x 100, or $3,000. Then if you sell those shares for $35 each, or $3,500, you make $500. Your simple ROI is ($3,500 – $3,000)/$3,000 or 0.1667, which is a return of 16.67%.
And the same calculation works if you sold your investment at a loss. If you sold your 100 shares for $28, your ROI would be ($2,800 – $3,000)/$3,000 or a loss of 6.67%.
The impact of fees
However, to determine the true ROI, you need to take into account the fees involved with buying and selling the stock. Say that you manage your own investments and it cost you $9.95 to buy the stock and $9.95 to sell it. Then your ROI is a little less, 16%, calculated as ($3,480.10 – $3,000)/$3,000. The reason we use $3,480.10 here is because we subtract the trading fees from the gain to show what you actually made on the transaction.
Now, let’s say you sold through a broker and there is a flat fee of $20 each way for buying and selling stock, plus a 0.9% commission to the broker on the sale. A 0.9% commission on $3,000 is $27. In this case, your total trading costs are $67 ($20 + $20 + $27). So from the gain, $3,500, you subtract those costs to get $3,433, or what you actually made on the investment. Your ROI would be ($3,433 – $3,000)/$3,000 or 14.43%.
Mutual fund and other investment products are more complex and require a more involved ROI calculation, but the fees do still reduce your overall returns. A good resource on mutual fund returns is the analyzer tool from the Financial Industry Regulatory Authority. You can use it to compare fees, called expense ratios, on different funds.
Other key factors
However, it’s important to consider other factors when evaluating an investment’s return. Making $1,000 on an investment sounds great, but it depends on the amount you invested and the length of time you held it.
For example, if you bought land for $150,000 in 2006 and sold it for $151,000 in 2016, that $1,000 profit isn’t as impressive. Sure, you got to use the land (and we’re assuming that the $1,000 profit includes all of your costs over the 10 years), but now compare that to an investment that tied up less of your money for a shorter period of time.
Say you buy 500 shares of a stock at $30 per share ($15,000 plus trading costs), and in a week it goes up to $32 and change. You sell and get $1,000 after costs. That gain required far less of your money but earned you the same amount.
At the same time, you owned the land for 10 years, which tied up money that might have been invested elsewhere for better returns, while the stock only locked up your money for a week. A ratio called the compound annual growth rate, a more advanced measure of the return of an investment over time, integrates the time value of money into your rate of return. You’d use a financial calculator to figure this rate out.
The ROI equation is a simple and helpful way to compare investment performance. With so many different factors, there is no set number for a good or bad ROI. You’ll want to use financial calculators or rely on a trusted financial advisor for more complex, in-depth calculations. Regardless of the methods you use, try to regularly check in with your investments so you can make changes as needed. And remember, returns are just one part of the equation when determining the best investment strategy for you.
Kathryn Hauer is a certified financial planner and fee-only investment advisor with Wilson David Investment Advisors in Aiken, South Carolina. Learn more about Kathryn on NerdWallet’s Ask an Advisor. This article first appeared at NerdWallet.