Your brokerage app shows a number, but it may not answer the question you care about. Knowing a few formulas lets you judge your results honestly and compare them with a benchmark.
Simple (total) return
Total return = (ending value − starting value + income received) ÷ starting value
Example: you buy $5,000 of a fund, receive $150 in dividends, and a year later it is worth $5,400. Your return is ($5,400 − $5,000 + $150) ÷ $5,000 = 11%.
Always include dividends and interest. Ignoring them understates returns, especially for bond funds and dividend stocks.
Annualized return (CAGR)
Over several years, a total return is hard to compare. The compound annual growth rate converts it into an average yearly rate:
CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1
$10,000 that grows to $16,000 in 5 years: (1.6)^(0.2) − 1 ≈ 9.9% per year. Note this is not the same as dividing 60% by 5 (12%), because returns compound.
When you add money along the way
If you contribute every month, the simple formula breaks down: part of your balance growth is just your own deposits.
- Money-weighted return (IRR): your personal return, taking into account when you added or withdrew money. Spreadsheets compute it with the XIRR function: list each deposit as a negative number with its date, and today’s balance as a positive number.
- Time-weighted return: removes the effect of your deposits. Fund companies and advisors use it, because it measures the investment or manager, not your timing.
Many brokers show both, sometimes under names like “personal rate of return.”
Make the number honest
- Fees: use returns after fees. See how to cut investment fees.
- Inflation: a 6% return with 3% inflation is about a 3% real return. Inflation and your investments explains why this matters.
- Taxes: in taxable accounts, what you keep is what counts.
Compare with the right benchmark
A portfolio of 60% stocks and 40% bonds should be compared with a similar blended index, not with the S&P 500 alone. The same logic applies when evaluating a financial advisor. Judge results over several years, never one quarter. The SEC’s Investor.gov calculators help you check the math.
