Unfortunately, the tool I discuss in this article, from the Sharebuilder site, isn’t available anymore. I’ll be on the lookout for a potential replacement.
You would think that calculating investment returns would be easy. It can be as complicated as you want to make it because annual returns are calculated based upon not only by what you make, but also over what time frame you made the money. If you are a dividend or income investor like me, you will have perhaps dozens or more transactions over any given year. So, each one will have its own return and the difference in return for each purchase can be quite large during the year even for the same investment.
I like to keep things simple. The easiest way to calculate return is to use the following formula:
Investment Return (%) = Investment Value / (Initial Investment + Added Money)
This way of calculating return is a very simple cash-in/cash-out percentage that doesn’t consider over what time frame that each transaction occurred. I like this because in the end percentages are OK, but you want to know at a high level how much money you made overall.
For example, lets say you invested $10,000 and added $500 during the year in new money + $500 in dividends or other income from the investments. At the end of the year, you had $15,000. Your investment return is $15,000/($10,000 + $500), or 42%. Anyone way of looking at this is that you made $4,500.
How About A Longer View?
If you listen to journalists and financial pundits, you may get a misguided idea about what your returns are over a longer period of time. For example, you will here repeated often that the S&P500 investor didn’t make any money over the last 10 years because the index value didn’t change.
This assumes that you invested your ‘chunk’ ten years ago, didn’t add to it, and didn’t reinvest dividends. This is unlikely to be true for most people. If you are to be a successful investor, you need to have a good idea about what your returns are over a longer period of time, because you may be making (or not making) what you think you are.
You can’t go wrong with the simple formula above, it measures the cash you put in and the total cash you have now.
This tool available at sharebuilder.com, ‘What If I’d Invested’ demonstrates that for even an investment that hasn’t appreciated overall, you can still chart impressive gains due to reinvestment and adding money. This is the way to succeed investing, probably more important than raw returns.
As an example, take Coca-Cola (KO) stock, which as of this writing is about the same price it was 10 years ago. However, when I input a $1,000 initial investment that reinvests dividends, I get an overall total return of about 45% over 10 years. Not too bad for an investment that ‘didn’t go anywhere’. See the chart below that is generated from the tool: