How to Calculate Your Rate of Return for 2009
At the beginning of each year, we take a look at how our SMI model portfolios performed over the past year. You should give your holdings the same kind of review to see how your results compared to what the overall market and our model portfolios returned.
Not sure how to do the math? Don't worry, we're here for you! Here's an easy way to calculate the approximate rate of return in any investment account. It won't be precise, as we're giving up a little accuracy in return for simplicity, but it's close enough for a reality check. (We'll treat all deposit and withdrawal transactions as though they took place at mid-year; this method will usually get within one percent of an account's actual return.)
Financial institutions provide account statements which include the data you'll need to perform the calculations. Get your beginning balance from the January 2009 statement, and your ending balance from the recent year-end statement. You'll also need to add up all the deposits and withdrawals you made during the year. (Treat any dividends or interest checks you may have received as withdrawals.)
In Example #1 below, deposits total $4,800 ($400 every month for 12 months) and there were withdrawals of $3,200. You can track the rest of the calculation by following the various steps.
Steps 1 through 6 make adjustments to the opening and closing balances so as to take into account any deposits and withdrawals. In step 7, the adjusted beginning balance is subtracted from the adjusted ending balance in order to measure how much the account has gained or lost in dollar terms. Steps 8 through 10 compute an approximate average monthly balance, and step 11 gives you the gain or loss in percentage terms.
Example #2 shows a couple's retirement account which is being used to supplement monthly income. The ending balance is lower than the beginning balance; however, this doesn't necessarily mean the account lost money on its investments during the year.
After neutralizing the effects of the $600 monthly withdrawal, it can be seen that the account actually showed a positive return of about 7.4% for the year.
Similarly, just because an account climbs in value over the year doesn't mean its investments were profitable. Example #3 shows an IRA which grew from $26,188 to $29,456. After taking into account the investor's $5,000 deposit, however, the calculation shows that the IRA account actually lost about 6.2% on its investments.
When comparing your investment returns to those of published benchmarks such as the Wilshire 5000, remember that they assume the amount invested is unchanged throughout the year. If you're dollar-cost-averaging (investing the same dollar amount every month), it's unlikely your results will be similar. Because you weren't fully invested for the entire period, you'll tend to do better than the averages in a down year and worse than the averages in an up year.
If you want a more accurate measure of your results than the method shown here, consider buying a personal finance software package such as Quicken Premier. It contains many useful reports, including a rate of return analysis on your portfolio. Be aware, however, that the process can be time consuming — you will need to enter every transaction that takes place in your account throughout the year. Buying expensive software of this type probably isn't worth it unless you are going to make full use of the other helpful budgeting and planning tools it contains. 
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Austin Pryor is the founder and publisher of the Sound Mind Investing newsletter and website. His desire is to help people understand and apply Biblically-based principles for making spending and investing decisions, ultimately helping them have more so they can give more. |
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Mark Biller is Sound Mind Investing's Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark is also the Senior Portfolio Manager of the SMI Funds. |
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