Investing is all about growing your money. In the words of Peter Drucker; if you can’t measure it you can’t improve it. So one thing we have to learn to do if we are going to be investors and good at it is to measure the performance of our investments. Many of the tools we use to invest do not always use performance measures that are comparable to our investment horizons. For example, a Ctrade or ZSEdirect account will show your portfolio change for the day but not for the week, month, quarter or year. Here are a few formulae you need to know to track your investment returns. They can be used manually or in a spreadsheet program.
Simple or lifetime return will help you calculate the rate of return your investment has achieved in its lifetime. So if you invested some years ago this formula will give you a percentage return over the lifetime of the investment. This will give you an idea of whether or not the investment strategy is worth pursuing.
Lifetime return = (Current value/ Amount invested)-1
This will give you a decimal amount which can be multiplied by 100 to express it as a percentage. Assuming you invested $1000 3 years ago and today your investment is valued at $3120. If we apply the formula we get;
Lifetime return = (3120/1000)-1
Return per annum
For simplicity, I feel it’s fitting we use the same example throughout so we will continue with our above example. So you made 212% as a lifetime return but returns are usually measured per annum so it would be great if you could annualise that return to make it easier to compare with other returns. The formula we will use here calculates the return per annum as though it were linear, meaning it will give you the average return per year rather than the exact return per year. So the returns may be attributable to some years more than others but what we will emerge with is an average.
Return per annum = [(Current value/Amount invested)-1]/number of years
If you’ve been invested for less than a year you can enter the number of (for example) months as a fraction out of 12, so 3 months would be 3/12.
Return per month
While per annum is the standard way to look at investment returns there are cases where looking at it on per month basis make sense. The shorter horizon is useful, especially when dealing with volatile or risky investments which you will need to keep an eye on. Or maybe you just want to keep a closer eye on your money. There’s nothing wrong with that. All we have to do is take the return per annum formula and substitute the number of years for the number of months.
Return per month = [(Current value/Amount invested)-1]/number of months
Not all investments pay through capital appreciation. Some investments may offer a portion of the proceeds or profit. We’ve seen this sort of arrangement in farmer financing investment programs. So we need a method that can measure these sort of investments as well. Having the yield as a percentage means we can compare this sort of investment to investments that have capital appreciation. The yield formula is very simple;
Yield = Proceeds/Investment
Assuming we had a competing investment alternative to the one in our rolling example. This one asked for $2000 upfront and paid us back (we will assume the returns are variable rather than fixed) $2300 over 2 years. Let us calculate the yield;
Yield = 2300/2000
We can annualise the yield by dividing the overall yield by the number of years as we did with the return.
Yield per annum = (proceeds/investment)/number of years
If the investment has a set rate of interest or return then that is the yield.
With these formulae, you can better track the rate of return on your investments and compare them with other investments you have in your portfolio or other potential investment opportunities you may be looking at.