The average return on a portfolio of stocks should show you how well your investments have worked over a period of time. This not only shows you how you performed, but it also helps to predict future returns. This metric should not be confused with an annualized return, which takes a multi-period return and expresses it as an annual compound growth rate.
Calculating the average return on your stock portfolio first requires calculating the return for each period. Then you can add each period's return together and divide that value by how many periods there are to get the average return.
Calculate Total Portfolio Value
Segregate your portfolio into different annual periods. You need the number of shares of each stock and the beginning and ending prices for each year. Multiply the number of shares of each stock by its price at the beginning of each year and then add each stock's total for the year.
As an example, if you bought 10 shares of ABC at $100 a share, you would multiply 10 by $100 to get a $1,000 initial value. If stocks DEF and GHI had total initial values of $2,000 and $1,500, respectively, add $1,000 plus $2,000 plus $1,500 to calculate a total portfolio value of $4,500.
Get First Year's Ending Value
Multiply the number of shares of each stock by the ending price for each year and then add each stock's total. The ending price in one year is the same as the beginning value in the next year.
In the example, if stock ABC grew to $120 a share one year later, multiply 10 by $120 to get an ending value of $1,200. If stocks DEF and GHI ended the first year at $2,500 and $1,250, respectively, add $1,200 plus $2,500 plus $1,250 to calculate the first year's ending value of $4,950.
Calculate First Year's Return
Subtract the portfolio's beginning value from the ending value of each year and then divide by the beginning value. Doing so calculates each year's return. Continuing with the example, subtract $4,500 from $4,950 to get $450. Divide $450 by $4,500 to calculate the first year's return of 0.10, or 10 percent.
Determine the Average Yearly Return
Add each period's return and then divide by the number of periods to calculate the average return. Continuing with the example, suppose your portfolio experienced returns of 25 percent, -10 percent, 30 percent and -20 percent for the next four years.
Add the three years of positive growth – 10 percent plus 25 percent plus 20 percent – to get 55 percent. Then subtract the two years of losses -- a total of 30 percent -- to get a total gain of 25 percent. Divide 25 percent by 5 years to calculate the average yearly return of 5 percent.