We all invest hoping to get a good return on our money. But how do you measure the probability of the expected return?
Of Course, it’s impossible to reach an exact number for the returns, however, there are several metrics that can indicate how far you can go. One such highly successful metric is the Return on Investment also called ROI.
The ROI is used to determine the gain or loss ratio as compared to the cost of investment. This will help you get a better understanding of the things.
So how to calculate the ROI for your investment? The Return on Investment is calculated by dividing the cost of the investment by the return.
Some other methods that give you a fair idea about how to get good returns on your money are:
Let’s give you a detailed explanation of how to calculate return on your investment portfolio. You need to follow the sequence discussed below to reach an estimate.
1. Prepare the prerequisite list:
There are so many uncertainties that revolve around investing that it becomes difficult to predict how much money you can make or whether you will get anything out of the investment. There is not just the market fluctuation that impacts the performance but other factors like political, economic, corporate and market sentiment that makes it difficult to figure out what approximate amount you can derive. Not just that, getting an estimate becomes difficult when you have invested your money across several investment vehicles that are managed by multiple firms and institutions.
In such scenarios, the foremost thing is to get a hold on the following requisite data. The total cost of investment with commissions and fees, the average return of the investment assuming that you have prepared the outline for the data, the first step is to define the period for which you want to make the investment.
Based on that you need to chart out whether you want to calculate the returns based on a weekly, monthly, quarterly or annual basis. Next, you need to come to net asset value (NAV) for each portfolio for a specific time period.
2. Returns for the Defined Period:
Now as you have defined your time and calculated the portfolio NAV, you are at a better place to make calculations. The easiest way to calculate the basic amount of investment from your holding is by holding period return. The simplest way to calculate it is by following the below-discussed steps:
a. Calculate the difference between the value of the end period with the initial value
b. Add your income to the amount
c. Now divide the value with the initial value
The returns are best evaluated when compared to returns for different time periods. This calculation gives you different percentages that show how your investment has performed over time and also includes interest and dividends. The sum you get is the total return from holding the assets for the specific time.
3. Adjusting Cash Flows:
You need to make adjustments in the cash flows from time to time if you have withdrawn or deposited from your investment portfolio. For instance, if you have deposited $200 in the middle of the month, the portfolio at the end of the month should be more than $200.That necessarily does not mean that your investment return grew in the month. The rise in the return could be due to various other circumstances.
4. Annualizing Returns:
The most common way is to annualize returns from different investments. This makes the returns more comparable than other ones. An annualized return is the average of money earned every year. This shows the amount you could have earned in the overall time period of the compounding has worked. The one thing that you could not see is the volatility that the investment went through the corresponding time. To understand the standard deviation you can measure how the data is distributed relatively.
In case, you can find the data points are further, you will see the higher deviation. These are some intuitive and simple metrics to calculate profitability in your investment portfolio.
These are certain limitations when calculating through the metrics like the period of investment and risk. However, despite some of these limitations, this is still a crucial metric used by analysts to measure and rank investment.
5. What is a good ROI for an investment?
Let’s show you how you can calculate ROI for your investment returns. If the sum of the total brokerage account, in the beginning, is $1,000 and almost $1,350 towards the end in a year, the return is 8.7% in a one-quarter investment portfolio.
With so much volatile in the market and unpredictable things, measuring the expected return should be more than guesswork.
The above method can reduce the inaccuracy in the expected results from the investments and also help you understand how to get a high return on your investment.
Having said that, you don’t need to draw a complete picture based on the assumptions. The smarter way is to always have a “Plan B” and not invest your entire money in one place. You are always recommended to maintain liquidity.