# How Are Your Investments Doing? Returns, Explained

Want to know how well are your investments are doing? The first step is understanding how to calculate your returns. And it's not as simple as you might think.

#### If you want to make informed investment decisions, it's important that you understand how to calculate your return on investment (ROI).

An investment's performance is more than just the amount it has appreciated since you bought it, whether we're talking stocks, bonds, real estate or some other asset. If you want to make informed investment decisions, you should learn how to calculate your return on investment or ROI.

The first step in calculating ROI is to determine the total cost of the investment. Total cost includes more than just the price of the asset you purchased, but also any investment fees. For stocks and bonds, that may include a commission, advisory fee or mark-up. For real estate, that may include property taxes, mortgage interest, insurance and other upkeep items.

And you'll also want to ensure you look at all returns, not just the appreciation of the asset's price. This would be things like dividend payouts or bond coupons.

That leaves you with the following formula:

Let's say you bought 100 shares of stock for \$20 a share, and you paid \$10 in commissions to buy the stock and will spend another \$10 when you sell. The stock is now trading at \$24 a share, and you earned \$140 in dividends on the investment over three years. Your return on investment calculation will look something like this:

That means your investment generated a total return of about \$520 or 25.7 percent.

That number by itself doesn't give you the whole picture, though. The amount of time you may hold any given investment can vary. As such, it is often best to compare investment performance by looking at the annualized percent return.

That comes from the standard formula for computing annualized return, which is:

In this case:

You will finish by multiplying the answer above by 100 to turn it into a percent. In this example, your annualized return is 7.792 percent.

This is more work that simply dividing the total returns—25.7 percent—by three, which would give you the simply average, but it's necessary to give you a more accurate measure of performance. The reason is investment returns compound. Using the simple average could leave you with an inflated view of an investment's performance.

In this example, 25.7/3 = 8.57 percent, well above the 7.792 percent you get using the annualized return formula.

If the price of the stock drops during the period you own it, and you have a loss instead of a profit, you would calculate returns the same way, but your return may be negative if income from the investment hasn't offset the loss in value.

You don't have to sell the investment to calculate your return. In fact, figuring return may be one of the factors in deciding whether to keep a stock in your portfolio or trade it in for one that seems likely to provide a stronger performance.

#### RELATED: Capital Gains Explained

In the case of a bond, if you're planning to hold it until maturity, you can calculate your total return by adding the bond income you'll receive during the term to the principal that will be paid back at maturity. If you sell the bond before maturity, you'll need to take into account the interest you've been paid plus the amount you receive from the sale of the bond, as well as the price you paid to purchase it, when figuring out your return.

But remember, just because you can calculate the ROI of various investments doesn't mean you can just simply compare them to make a judgement about your portfolio.

#### RELATED: Bond Yield and Return

Stocks and bonds often don't fulfill the same role in a portfolio, so you want to be sure to avoid comparing apples to oranges. Instead, you'll want to measure the performance of your investments against the standards of other, similar investments. For example, if you own shares of a mutual fund that aims to track a particular index, you can compare the performance of the fund to that particular index.

As you embark on this journey to evaluate your investment returns, don't forget that FINRA has a number of free resources to help you out. Be sure to check out FINRA's Market Data Center and the newly enhanced Fund Analyzer tool. For some more helpful tips, checkout Evaluating Investment Performance.