Knowing how to calculate return on investment (ROI) is a useful skill that improves your ability to invest wisely.
- The basic formula for calculating return on investment is to take the original amount you invested (say, $10,000), and subtract it from the current value of the investment (say, $12,000). The result, in this case, would be $2,000. Then, divide that amount by the original investment amount. Dividing $2,000 by $10,000 gives a result of .2, or 20%. Your return on investment for this scenario is 20%.
You may also want to know the simple annualized return on investment, also known as average yearly return, that your investment yields. To find your simple annualized ROI, divide your total ROI by the number of years you have held the investment. For example, if you invested your $10,000 in March of 2008, and sold your investment in March of 2010 for $12,000, the length of your investment period would be two years. Dividing 20% by two years gives you a simple annualized return on investment of 10% per year.
- You could also have a negative return on investment, which means that your investment lost money. For example, if you invested $10,000, and two years later you had $8,000, your return on investment would be $8,000 minus $10,000, divided by $10,000, or -20%.
- Here is a more complex example. Say you invested $10,000 in September of 2007, and sold your investment for $13,500 in March of 2010. The $13,500 minus $10,000 is $3,500, divided by $10,000 is .35 or 35%. Your simple annualized return on investment would be 35% divided by 2.5 years, or 14% per year.
This method provides a basic return on investment calculation. To calculate return on investment in a more exact way, you need to take into account things like brokerage fees, purchase and sale costs of the investment, financial planner costs, and more. In addition, using the simple annualized return on investment hides the volatility that many investments have. If you have a total ROI of 20% over a span of five years, it could mean that your investment steadily made 4% each year. Alternately, your investment could have made 10% in the first and third years, lost 10% in the second and fourth years, and made 20% in the fifth year.
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