Find The Best Insurance
We make it easy to compare and buy insurance.LEARN MORE
The simple way to measure the growth of your investments.
If you’ve profited from an investment — made some money from a bond or the stock market — you might be looking for a way to measure how much you earned. Calculating the rate of return is the simplest way to compare the growth on your investments.
Also known as return on investment, rate of return is how much an investment has lost or gained over a specific period of time. A positive number indicates a gain, while a negative number indicates a loss.
In this article:
You can calculate the rate of return for any investment that has a measurable initial value and final value, including bonds, stocks, and even gold and real estate. The final value of an investment includes any dividend payments or coupon earnings. The initial investment value should include all costs of capital, or necessary costs to make the investment, like fees and taxes.
Rate of return = (final value of investment - initial value of investment) / initial value of investment *100
Example: You purchase 10 shares of stock at $10. You sell the shares after three years at $14 per share. You also received yearly dividends of $1 per share.
The initial value of your investment, or cost of capital, is the $100 used to purchase the stocks. The final value of your investment is $170 ($140 from the sale, plus $30 in dividend payments).
Plugging into the formula above:
Rate of return = ($170 - $100) / 100 * 100
Rate of return = 70%.
The simple rate of return formula above tells you how much your investment grew over the entire time you had it, but it does not tell you how much your investment grew from year to year. For that you need to find the annualized rate of return, or compound annual growth rate (CAGR). This shows the growth rate of your investment if it grew at the same annual rate and if you reinvested the profits every year.
Annualized rate of return = final value of investment/initial value of investment)^(1/ number of years) - 1 *100
Using the example in the previous section:
Annualized rate of return = (170/100) ^ (⅓) - 1 * 100
(1.7) ^ (⅓) - 1 * 100 = 19.348%
As you can see, the 19.348% annual rate of return on your stocks is much smaller than the simple rate. Keep in mind that the amount of money you made is still the same; the annual rate just gives you a different way of looking at your growth.
Rates of return provides a quick, at-a-glance way to measure how much an investment grew. It works for different types of investments and gives you a simple way to compare your investments.
The compound annual growth rate is handy when you want to more objectively compare rates of return on investments of varying lengths. For example, it’s useful if you wanted to compare the earnings on a three-year-old stock with your earnings on a five-year-old bond.
At the same time, rates of return and the above formulas can prove too simplistic in some cases. For certain long-term investments, there may be more grey area when figuring out the costs of the initial investment value, which will make it more difficult to calculate the rate of return.
There is no one such measure of a good rate of return as the rate of return depends on the type of asset you have. Riskier investments might yield higher returns, but their volatility can also leave you with even less than what you started with.
Certificates of deposit (CDs) and bonds with fixed rates, for example, will yield steady growth. On the other hand, the returns on real estate or gold can vary, and what constitutes a good rate will depend on your circumstances and expectations. The average annual return on a treasury bond is around 3%, while the stock market historically has returns of between 7% and 10% per year.
Ready to start investing?
Policygenius is partnering with Wealthfront to help you invest in your future.
The internal rate of return, or discounted cash flow rate of return (DCFROR), is another way to evaluate investment performance by taking into account the time value of money. This is the idea that having money in hand now is worth more than receiving that same amount of money later because you have the potential to invest and earn more if you have the money now.
Along with return on equity (ROE), which measures the profitability of a business, and return on assets (ROA), how profitable a company is compared to its total assets, internal rate of return is another way to measure investment performance. With a more complex formula, internal rate of return is primarily frequently used by businesses and serious investors to evaluate the profitability of a potential investment or project.
Your home may be your most important investment of all. Make sure it’s protected with homeowners insurance.
Policygenius can help you get coverage that fits your finances.
Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.
This post contains references to products or services from one or more of Policygenius' advertisers or partners. While these codes earn us a small fee at no additional cost to you, they do not influence editorial content and we only refer products we love.
Was this article helpful?
Security you can trust
Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
Copyright Policygenius © 2014-2019