How to calculate return on investment?

Question

7 years ago, I put exactly $100,000 into a brokerage account. I traded in and out of stocks and ETFs. The account grew to $140,000 in that time period. (I pulled out the $40k gain this week.) How do I calculate my return on investment? IRR? ROI? Annualized? Did I do well? Or poorly?

Bonus points for something I can use in Excel or Quicken.

Answer 1

You got 4.9% per annum. Note bad considering that current interest rates are about 1% but you could've done much better over that time period. Internal Rate of Return is more for investments that generate income and is used to decide whether or not a profit generating business venture is worth the effort, a lot of stock trading is purely speculative. Besides IRR is usually calculated by iterative non-linear computational algorithms and would have to be done in a VB macro in Excel. You can really bring your spreadsheet to a crawl with macros. As to calculating per annum interest rate, it's just e^(ln(140000/100000)/7)-1. On excel, if the $100,000 was in A1, $140,000 was in B1 and 7 was in C1, I would probably do "=10^(log(B1/A1)/C1)-1", then format the cell into percentages.



Note had you kept it the $40k in there, the portfolio would've grown exponentially. The whole concept of exponential growth is based upon reinvestment. That's why they tell you to never underestimate compound interest. Taking the 40k out locks in your profit but reduces the growth rate of your wealth.

Answer 2

I did a quick run on your numbers and if you want the annualized rate before taxes, it comes out to roughly 5.77%.



However, nothing is tax free so I just did a quick assumption of a 10% tax on your capital gains. The ROI then drops to about 5.26%.



Then if you account for inflation, it will drop again another 3% to around 2.26%.



Given the market conditions between 2007 and early 2009 I would say you did okay. A lot better than many hedge fund managers did during that same time period. hahaha



If you have any questions, just let me know.



Christian Nago



Christian Nago

Answer 3

There are dozens of very safe investments that would have got your 5+% a year just by putting the money in, forgetting it and doing something else with your time.