Calculating Investment Returns

2017-10-05T16:14:54+08:00By |Investing|2 Comments

How do you calculate your investment returns & performance? What about if you have multiple investments or multiple investment time frames? What is the difference between ARR vs CAGR? Or CAGR vs IRR?

calculating-investment-returns

 

Return on Investment (ROI)

ROI measures your investments return on your investment capital

ROI = Investment Gain / Investment Cost

E.g. 

  • Investment: 100k
  • Returns:
    • Y1: 40k
    • Y2: -10k
    • Y3: -25k
    • Y4: -10k
    • Y5: 5k
  • Total Returns: 15k
  • ROI: 15 / 100 = 15%

Pros: Simple & fast to calculate

Cons: ROI does not take into account the duration of your investment

 

Average Annual Return (AAR)

AAR measures your total gains averaged out over your investment years.

AAR = Sum of Annual Returns % / # Years

E.g. 

  • Investment: 100k
  • Returns:
    • Y1: 40k (40%)
    • Y2: -10k (-10%)
    • Y3: -25k (-25%)
    • Y4: 5k (5%)
    • Y5: 5k (5%)
  • AAR (Latest Year): 5%
  • AAR (Latest 3 Years): (5% +5% -25%)/3 = -5%
  • AAR (Latest 5 Years): (5% +5% -25% -10% +40%)/5 = 3%

Pros: Provides more meaningful information on returns vs ROI & comparison versus other similar investment performances. Especially favored by unit trusts (mutual funds) to show performance.

Cons: AAR simply gives you your average returns over X number of years. It does NOT show you how your investment performs on a year to year basis & does not show the effect of compounding returns.

 

Compounding Annualized Growth Rate (CAGR)

CAGR measures the cumulative effect of gains (or losses) over a time period.

CAGR Calculation:
n = years
PV (Present Value) = investment
FV (Future Value) = investment value after n years
CAGR = Calculate i % (Interest)

Pros: CAGR allows you to compare different investment performances over time including the effects of compounding

Note: You will need a financial calculator (Compounding function) or a spreadsheet to calculate CAGR

CAGR calculation in Excel

CAGR calculation in Excel

The example above shows that if you have 100k earning 2.83% returns compounding over 5 years, you would have 115k at the end of year 5

 

Internal Rate of Return (IRR)

IRR like CAGR measures the cumulative returns annualized including compounding & in addition, considers multiple cash flows over the period

IRR Calculation:
Initial Investment: – investment capital
Cash flow for each year: Gains (+) / Losses (-)
Final year: Cash flow + original investment capital
Calculate IRR %

Pros: IRR provides a more accurate calculation of compounding returns especially in real life where you may have multiple investments / withdrawals in a single investment over the years.

Note: You will need a financial calculator (cashflow function) or a spreadsheet to calculate IRR

irr-excel

IRR calculation in Excel

 

Recommendation

At MyPF, we will usually use CAGR to calculate returns (using a financial calculator or excel for reviewing shares fundamental analysis). For more complex transactions with multiple cashflows, we will use IRR. We also keep track of total ROI which is helpful to see when you have some longer term investments.

(Note: Except for properties whereby we focus on Yield & Cash on Cash returns)

 

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2 Comments

  1. Eric LKL October 5, 2017 at 10:24 am - Reply

    How to calculate the ROI if got top up investment fund annually.

    Eg. Example

    Yr 1 – RM 10k
    Yr 2 – RM 12k
    Yr 3 – RM 11k

    Hi Eric, ROI would simply be your total gains vs invested capital without taking into account the time value of money. A likely better calculation would be to find out the IRR. You will need to use a financial calculator or Excel though to calculate based on your cashflow for each period (i.e. Yr 1, Yr 2, Yr 3, etc). You can also check out our deposit calculator here which can may be able to give you a rough approximation:

    Compounding Interest Calculator

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