From Ken Little,
Your Guide to Stocks.
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How is your portfolio or stock doing? Have you calculated its return lately, and, more importantly, have you calculated its return in a meaningful way?

There are several calculations that will give you an idea of how an investment is doing. Some are more complicated than others are, but none are beyond the reach of the average investor and a calculator.

Here are several calculations you can use to help you understand how your investments are doing.

Total Return

This is a simple calculation, but it reminds us that we need to include dividends (where appropriate) when figuring the return of a stock. Here is the formula:

(Value of investment at the end of the year – Value of investment at beginning of the year) + Dividends / Value of investment at beginning of the year = Total Return

For you bought a stock for $7,543 and it is now worth $8,876, you have an unrealized gain of $1,333. You also received dividends during this time of $350. What is the total return?

($8,876 - $7,543) + $350 / $7,543 = Total Return
$1,333 + $350 / $7,543 = Total Return
$1,683 / $7,543 = Total Return
0.2231 or 22.31% = Total Return

You can use this calculation for any time period, which is a weakness since it doesn’t take into account the time value of money.

Simple Return

Simple return is similar to total return, however it is used to calculate your return on an investment after you have sold it.

Here is the formula:

Net Proceeds + Dividends / Cost Basis - 1

Let’s run through an example. Suppose you bought a stock for $3,000 and paid a $12 commission. Your cost basis is $3,012. You sell the stock for $4,000 and there is another $12 commission, so your net proceeds are $3,988. Dividends amounted to $126.

$3,988 + $126 / $3,012 - 1 = Simple Return
$4,114 / $3,012 – 1 = Simple Return
1.36 – 1 = Simple Return
0.36 or 36% = Simple Return

Like the Total Return calculation, the Simple Return tells you nothing about how long the investment was held. If you want to see after-tax returns, simply substitute “net proceeds after taxes” for the first variable and use an after tax dividend number.

Compound Annual Growth Rate

For investment held more than one year, you may want to look at this more sophisticated, but not much more complicated calculation.

The Compound Annual Growth Rate shows you the time value of money in your investment. A 40 percent return over two years is great, but a 40 percent return over ten years leaves much to be desired.

I devote a whole article on this important calculation. You can find it by clicking here.

Conclusion

Simple or slightly more complicated calculations can give you a better fix on how your investments are doing.