The best way to measure how well your investments are doing is to compare their gains or losses over a period of time as a percentage of your initial investment. Using percentages allows you to accurately compare investments of different sizes. For example, while $5,000 might sound like a great return on an investment, the investment was significantly better if you only invested $10,000 than if you only made a $5,000 return on a $1 million investment.
Total Return Percentage
To figure the total percentage investment return for the entire time you’ve held an investment, you need to know what you paid for the investment and how much you received from the investment through selling it. When you calculate your total return, include any dividends you’ve been paid over the time you owned the investment because that adds to your total return. First, subtract what you paid for the investment from your total return to find your gain or loss. Second, divide your gain or loss by your initial investment. Third, multiply the result by 100 so you can convert it to a percentage.
For example, say that you invested $2,400 in a stock ten years ago and in total, you earn $5,000 from selling the stock. First, subtract $2,400 from $5,000 to find you earned $2,600. Second, divide $2,600 by $5,000 to get 0.52. Third, multiply 0.52 by 100 to find you earned a total return of 52 percent.
Annualized Percentage Return
While finding your overall return is useful, it doesn’t help you compare the rates of return for investments for different periods of time. For example, if one investment grew by 18 percent over a four-year period, you don’t know whether that’s better or worse than a 40 percent return over eight years. To make an accurate comparison, you must calculate the average annual report.
To do that, divide the final value by the initial investment. Then, raise the result to the power of 1 divided by the number of years you invested the money. You’ll need to use the exponent key on your calculator. Next, subtract 1. Last, multiply by 100.
For example, if you invested $2,400 and ten years later your investment is worth $5,000, divide $5,000 by $2,400 to get 2.08333. Then, raise 2.08333 to the 1/5 power to get 1.158. Next, subtract 1 to get 0.158. Last, multiply 0.158 by 100 to find the average percentage investment return over the five-year period equals 15.8 percent.
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