I’ve had a number of members contact me in recent months asking the best way to calculate their investment returns over different periods of time. Sometimes we want to know what we made last year, this year to date or perhaps over the last month.
So, to help members and our wider blog audience tackle this, I thought i’d write this article to help.
It’s actually rather simple, and I personally tend to use a simple formula that one can write down and have near their desk. Or, do what I do, and write it on the inside page of my trading journal.
So here is the formula:-
Current Balance – Starting Balance – Additional Deposits = Return Amount
To explain, imagine you wanted to know how much return you have made so far in 2021. You would take perhaps today’s balance of your investment portfolio, minus the balance of your investment portfolio on January 1st, and then minus any deposits you have made to that portfolio so far that year. What is left will be profit achieved from your investments.
But how do we work out the actual percentage?
Easy to do, but can be hard to always remember if you do not crunch these numbers regularly.
Get your phone calculator out, and do the following:-
100 / Starting Balance x Return Amount = % return
Essentially, if you had £18,000 on January 1st, and after running the formula you have worked out you have made £2,856 in profit, your sum would look like this,
100 / 18000 x 2856 = 15.9%
This can be done over any parameters of time.
Want to just look at this month? Find out your portfolio balance on the 1st, work out what additional deposits you’ve put in this month, and find out the value of the portfolio balance for the last day of the month, or today if the month is not yet over. You then have everything you need to work out your return over that time period.
A quick note on percentages
Members can sometimes make the mistake of adding monthly returns together to give them their year to date. However, doing so will not give you an accurate reflection of your returns.
The reason for this is that each month is a percentage increase or decrease based on the end of the previous month only.
For example, if you started with £10,000 and made 5% return in Jan, you now have an extra £500. Making your balance £10,500. If you then go on to make 5% return in Feb, you’ll make £525, giving you £11,025 balance. If you were to make another 5% return in Mar then you’d have made £551. Leaving you with a balance of £11,576.
Many investors will assume they made 15% return (3x 5%). However, the correct way to look at year to date is to use the above formula we have already looked at. By taking the starting balance of the year at £10,000 and looking at todays balance at £11,576, you’ve made £1576, or 15.7% return. This is because each percentage increase was achieved on the previous months end balance.