# How to calculate your return on investment

Determining your **return on investment** is a very important part of any investment review. Whether you’re investing in savings accounts, stocks, real estate, capital upgrades, or new business ventures, estimating a return on investment will aid you in choosing among investment options.

I don’t simply calculate a straight return on investment. I prefer determining an **annualized rate of return** that takes into consideration the timing of investments and return, as well as compounding. Most of you are probably familiar with this concept through the term **Annual Percentage Yield** (APY), **compound annual growth rate** (CAGR), or **internal rate of return** (IRR). Let me walk you through the steps on how you can calculate your return on investment in terms of APY:

**Step 1. Calculate all the costs associated with an investment.**

Ask yourself the following questions about the investment:

- What are the initial upfront costs associated with the investment?
- What are the maintenance costs?
- Are there any fees or taxes associated with the investment?
- What kind of research costs will you incur to properly evaluate (
*i.e.*, due diligence) the investment? - How much of your time will this investment consume? Your time is valuable, so a complicated project could have real opportunity costs.

Basically, don’t forget the hidden costs often associated with investments. Be sure to list out all costs you can think of.

**Step 2. Estimate or calculate your returns.**

- How much do you expect to gain from the investment?
- When do you expect returns to happen?

Determine how much you expect to gain from the investment. Detail specifically all the individual returns you expect to receive from the investment.

Since returns from investments are often uncertain, you might also want to jot down what you think the probability of each return occurring when you thought they would. Be sure to also specify when these returns will occur and for how long. This will be important for the next step.

**Step 3. Establish a timeline for costs and returns.**

Draw a simple timeline or just list in chronological order all the costs and returns you discovered in steps 1 and 2. Costs should be listed as negative dollars and returns as positive dollars.

For example:

- 1/1/2006 Initial investment cost: – $100,000
- 9/21/2006 Sell investment: $120,000

**Step 4. Calculate annualized return of investment or APY.**

This is the meat of the process and the most challenging step of calculating the return on an investment. Let me explain it using a simple example that we started above.

Let’s assume you made an investment on January 1, 2006. That investment cost you $100,000 including fees. Today, September 21, 2006, you decide to sell that investment and you receive $120,000 after all expenses.

Now we want to find the APY of this investment so we can compare it to other investments or even your savings account rate. In finance, this is often called calculating your **internal rate of return**. Technically this process involves determining a **discount rate** at which the **present value** of a series of investments is equal to the present value of the returns on those investments. (Ah, this brings back memories of economics in graduate school.) Thankfully, you don’t have to fully understand the process of how this is calculated in order to use it.

For a simple situation like the example above:

APY or IRR = (Final return/Initial investment)^(365/days) – 1

In English, this means that APY equals the final dollar amount divided by the initial investment (positive number for this equation) raised to 365 divided by the number of days the investment took to complete. Then you subtract one from the number you just calculated and multiple by 100 to get your percent APY.

Too bad most investments are not this simple. You often have to pay additional capital in throughout the investment project (e.g., quarterly taxes) and your returns often come in periodically (e.g., monthly) and often with a final lump sum payout (e.g., you sell your investment to someone and get paid).

Modern spreadsheet software includes a great function to automagically find the internal rate of return (IRR), which is the same as APY. Microsoft Excel (MSFT), Open Office (SUN), and Google Spreadsheets (GOOG) include the flexible **XIRR** function that can take a list of investments and returns and the corresponding dates of those events and calculate the APY for that investment. This is a powerful and very useful function that I recommend everyone learn how to use and understand. The XIRR function is very flexible. You can you it for very simple investments like the example above or much more complex situations that include payments that occur regularly or even irregularly.

Let me show you a two examples:

**Example #1 – Monthly returns**

**Example #2 – Yearly returns**

View the examples using Google Spreadsheets.

View the examples using Excel spreadsheet: Annualized rate of return.xls. This spreadsheet includes the simple example from earlier in the post as well.

Notice how the return in Example #1 is much higher than that of Example #2 even though the payment amounts and total profit are the same. The key difference is the timing of the payments. Because the returns in Example #1 come monthly, the annualized rate of return or APY is much higher. In Example #2, profit dividends only come in annually. That dramatically reduces the APY. I like using annualized rates of return because they account for the time value of money.

That’s it! Now you know how to properly measure your return on investments. Compare the different annualized rates of returns for your various investment options and then you can select those with the highest rates of return (assuming risk is equal among the alternatives). You can also determine your “real” return by subtracting out the average rate of inflation from the annualized rate of return. This way you can determine if you are actually building wealth with your investments.

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This is excellent. I like to give myself the ability to do constant pro forma analysis. Cell references in Excel facilitate this, allowing me to compute based on the contents of a cell, which I can change, rather than formulize a given percentage.

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Ah, very useful indeed, thanks! Our how-to is up as well if you’d like to check it out!!

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How do you take account of lucky picks from distorting your return? In my situation, I made a big purchase on September 2006 that went pretty lucky. The stock has gone up 5%. This skewed the annualized return. According to Excel’s XIRR, asof December 31, 2006, I’ve made 18% return on it. Anyone have any insight?

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Your calculations are wrong!

IRR is 28% and 3.59% respectively in your examples above!

ML,

I do not see the error with my calculations. Could you share with us how you came up with an IRR of 28% and 3.59% respectively?

Thanks for the very good post about how to calculate rate of return! I wrote my own post about the XIRR spreadsheet function on my own blog, referring my readers to this post. I found the Excel spreadsheet especially useful. I hope that this is OK with you.

pfstock I’m glad you found this post useful. Thanks for the feedback and the linkback.

sir i have done my m.b.a. in marketing and presently i am associated withan fmcg company but i am interested to do some course in finance if u guide me in this relation then it will be great moreover if u could send me some literature in context to finance then i would be verythankful to u my email id is tgupta83@yahoo.co.in

I can’t seem to adapt this to work for me. I buy and sell stocks frequently. I also deposit and withdraw money from the account frequently. What would be the best way to calculate how my entire portfolio is doing?

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Hi George, the XIRR function is not recognized in Google spreadsheets – is there something I’m missing?

Great article – thanks!

Jonah, the XIRR function is working in my example Google Spreadsheet. Be sure the dates column for the XIRR function are properly formatted dates in Google Spreadsheets. Sometime they can get converted to standard text. I hope that helps.

Hi George,

What method would you use to compare the $100,000 initial investment in your example to investing that money in a high yield savings account with 5% compounded interest? I’m trying to find the correlation between the final answer APY/XIRR in your example and the 5% compounded interest number – basically to answer the question – how does this investment compare to a simple bank account at x% compounded interest?

Thanks in advance!

a humble request to all the Financial wizards……can somebody tell me the difference between Return ON investment and Return OF investment ???

Thnx & regards,

Rajesh Pawar

Thanks for the info about to calculate your return on investment – Fat Pitch Financials!

In calculating the IRR% using MONTHLY cash streams does one multiply the formula by 12 irrespective of whether the cashflow is say 12 months or 48 months ie. you’re using the figure 12 as a common factor to convert years to months?

Could somebody please help me know how to figure this hypothetical situation:

I invest $1000 per month in a mutual fund. After 12 months, it is worth (with growth & dividends) $15000. What was my rate of return, assuming $1000 per month meant that my total investment is $12000? I could figure it easily as 25% if I invested $12K one time, and one year later it was worth $15K, but I do not know how to figure it since I invested $1K twelve different times – monthly.

Thank you.

How do you take into account the fact that you make withdrawals during the year. Example: Balance Jan 1 is $100,000; take out $1000/month each month and withdraw $20,000 on Aug 15; balance Dec 31 is $103,000. What is that real return on you investment for that year.

Thanks Bob

Nice and Simple article. Examples are excellent.

Hi,

I would like to know , how to calculate monthly gai/loss of NAV in percentage.

Thanks,

Sanjay

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How do I find your calculator for annualized rate of return?

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Pls can someone tell me how to calculate Return On Investment for a Sector. For instance if i want to calculate ROI for the agricultural sector. Thanks

For all those asking about how to calculate return when there are cash flows in or out of the account during the period, you need to use TWIRR: Time Weighted IRR. This makes your calculations comparable to other published returns, for instance from mutual funds.

http://www.dailyvest.com/Products/prod_calcmethods.aspx#twrr

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How do I calculate the avg yearly gain of an investment portfolio over 5 years when there are periodic deposits & withdrawals to the portfolio?

Current value =22000

start value=10000 (5 yrs ago)

several deposits during the 5 yrs total 5000

several withdrawals during the 5yrs total 2000.

thank you.

Rob.

@Rob:

My comment (just above yours) answers your question. Only caveat is you need to know the market value of the account on the days of the deposits and withdrawals.

Regards.

Outstanding stuff! Anyone know if any brokerage firm provides the annualized rate of return without having to use a spreadsheet? Thanks, Aaron

I have data from nseindia.com which contain index value suppose for year 2005 starting from 1/1/2005 to 31/12/2005 and i want to calculate log retuns. how will i calculate it?

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Hi

I am facing some problem on how to get the required rate of return of a project. Below are the information provided.

TJW estimates the covariance between the S&P500 and TJW to be .09. The standard deviation of S&P500 returns is 30% and the standard deviation of TJW returns is 35%. The expected return on the S&P500 is 14% and the risk free rate is 7%. The project is 25% riskier than the firm’s average operations and the firm is 100% equity financed.

I have already found the Beta but I am not sure how to adjust this beta according to the additional amount of risk faced by the project. Can anyone help me with this ? Thanks

thank you for sharing, this made it really easy to understand.

Looking for feedback on this spreadsheet I created comparing real estate vs. any interest bearing account.

http://www.editgrid.com/user/jonahu/RealEstate_vs_HighYield

I was looking for a way to compare the two investment methods strictly from a ROI stand point.

I suppose this comparison could also be used to compare real estate vs. stocks by inputting your expected interest rate of return for High Yield Interest Rate.

Is this comparison valid/fair or flawed?

Thanks.

sir,i work for an FMCG organisation food stuff, with a wide distribution network , the operational costs for distributors would be thier fuel costs,manpower costs,depreciation on vehicle,etc.,on a daily or monthly basis,i would like to know if i have to calsulate thier ROI would i be taking into account thier fixed costs like ,investment on vehicles and Godown deposists,etc,or just calculate thier monthly rentals , kindly advise , how thier ROI is calculated,Thanks,Regards,Sandeep.

Im in real estate and need to figure out the annual ROI on a property.

Hello sir, im an Bachelor in Accounting student. Currently im doing a project on share market investment. I want to find how to calculate log return for the investment. Can u tell me how to calculate? This is the question. Thank you.

Date High Low Last Volume

2010-06-10 0.670 0.660 0.670 350

Stock Summary

Average Price: RM0.68

Average Volume: 800.17

Total Volume: 24,005

**Volume: No of Lots

**1 Lot = 100 shares

i need details for costing that are using in FMCG companies

i mena how they are doing costing if u have and exmaple kinldy please send to my email address

How can i calculate about the expected return of mutual fund.

face value of share rs.50 no. of shares 20, discount rate 5%, dividend received 13.5% p.a. calculate roi

xyz corporation sells on terms of 2/10, n/30 70% of custumers normally avail of the discounts annual sales are P900,000 80% of w/c is made on credit. cost approximately 75% of sales. what is the average balance of accounts receivable? and the average investment?

sir can u pls tell me which is the best course as of now if you want to pursue your career in the finance field?

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4. S Limited is considering for purchase of a machine. There are two

possible machines which will produce the additional output. Details of these machines are

as follows:

Machine x Machine Y

Rs. Rs.

Capital Cost

Sales at standard Price

Costs:

Labour

Materials

Factory Overheads

Administration Cost

Selling Costs

Expected life in years 60,000

1,00,000

10,000

8,000

12,000

4,000

2,000

2 60,000

80,000

6,000

10,000

10,000

2,000

2,000

3

Other Information:

(a) The costs shown above relate to annual expenditure resulting from each machine. Sales

are expected to continue at the rates shown for each year for the full life of each machine;

(b) Tax to be paid may be assumed at 50% of net earnings;

(c) Interest on capital is to be ignored;

(d) The appropriate rate of interest for converting to present value may be taken at 10%.

On the basis of the facts given above, show the most profitable investment by the following methods.

(i) Pay-back Period,

(ii) Return on Investment; and

(iii) Net Present Value on Investment.

I come up with the same numbers as Simon, 28% & 3.6%. I’m interested in my Personal Rate of Return. So I don’t include the dividend/profits in the calcuation. They are not funds I’m pulling out of the account at the times they’re added. On the other hand I am having to pay taxes. (Not sure why those dates aren’t more like April 15 however.)

So the string of cash flows becomes simply: $100k in, $1k in, and $129k out.

We plan to invest Rack for LCD TV that :

Cost $129 200

expected life time 5 years

Qty 152 unit

How to get Return of investment of our invest?

Hello.

My Investment property is purchased for$9 000 000. One year later it has earned a net rent of $810 000 and now valued at at $9 239 521.

What is the investment return of the property as a percent.

Do you 810 000/9 000 000 /365days -1 x 100 to get the percentage.

This is an excellent article. Simple and easy to understand

Thank you

please change your template or back ground co lour because it is difficult to see.

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There is nice info about how to calculate your return on investment…thanks to share it ..

Wonderful explanations… Thank you! I have an interesting situation. I created a swing trading system that trades the SPY. When I use XIRR to calculate the APY, Excel calculates a value of 8.65% for my system and 4.86% for buy and hold. These calculations are made for the period 1/1/2007 to 5/31/2015. And now for the interesting part. These calculations were made using a starting balance of $25,000. With buy and hold, the full $25,000 is invested continually for the entire period. My system, on average, only requires an investment of 16.3% of the portfolio balance. It scales in up to 10 times with increasingly larger buy orders; and when a sell signal triggers, they are all sold with one sell order. How do I calculate the true APY when there is so much unused cash in the portfolio that can be used for alternative purposes?

Really helpful piece of content you shared here! Calculating an ROI is never easy and I have to say you made it easy to understand and nailed it the right way.

Cheers

How is the calculation when I increase and/or decrease the position during the period, e.g. buying 100 stock at t0, then another 50 @ t2, then @t2 sell the half (-75); and between these I receive dividends?

I’d also be interested in the “lean” performance, i.e. after selling the 75 stock I should “remove” the dividend payments such that I have the instantaneous performance of the remaining stock.

Any thoughts?