Learn About Investing

Learn About Investing

Learn about

Calculating returns

This is about calculating investment returns and how it relates to investing in general, not Orbis Access in particular.

Calculating risk

Do your investments add up?

Keeping an eye on your returns (profits and losses) is an important ingredient to successful investing over the long term.

Your financial service provider should provide figures letting you know how your investments are getting on. Even though you won’t have to calculate them yourself, it is important to understand what they mean.

Investments involve expenses and these need to be accounted for when working out your returns. Fees are ‘automatically’ deducted from funds and thus already factored in.

1. Let’s say you invested £100 and over time it grew to £120. Your total return in this instance is £20.

2. The rate of return of an investment can tell you the percentage gain (or loss) relative to the purchase price. This figure will normally include the following:

  • Dividends from stocks
  • Interest paid out by bonds or cash
  • Fund distributions (which are a combination of dividends and interest the fund receives from the companies the fund invests in. These are usually reinvested into the fund)

For those investing in property, like a buy-to-let flat, returns may include any rent - minus expenses - as well as the gain or loss in the value of the property.

It’s a relatively simple calculation to make:

 Calc2 500X154

Here's an example

Let’s say you invested £100 and over time it grew to £120, your rate of return is:

Calculation 2

3. The total return is a simple way of evaluating past returns, but doesn’t take account of the amount of time you’ve been investing.  Calculating a year-on-year growth rate over a specific period is more complex and there are different ways of going about it. One common method is the compounded annual growth rate. It describes the rate at which an investment would have grown if it had grown at a steady rate. It’s roughly equivalent to the Annual Percentage Rate (APR) interest rate figure on savings accounts and loans.

4. If you made additional contributions or withdrawals during your investment, you need to take that into consideration as well.  You can calculate this with one of two ways: time-weighted return or money-weighted return. Both are valid ways of calculating return, but time-weighted return is better for evaluating fund performance whereas money-weighted return is better for evaluating your own portfolio's performance.

But remember that past investment performance is no guarantee of future returns and you could get out less than you put in.  

And be aware that these figures show how much you’ve made or lost in absolute terms, not how your investment fared relative to others. To assess comparative returns, you need to get stuck into benchmarks. This is an entirely different way of measuring success.