Estimate Your Overall Personal Rate of Return With 3 Numbers

Many people like to see how their investments did in a year. You can look up the performance numbers online, but if you bought or sold during the year, those numbers won’t match your own rate of return because the numbers online assume

(a) a single investment at the beginning of the year; and

(b) it’s held until the end of the year with no additional deposits or withdrawals.

In addition, in order to measure your progress toward your end goal, it’s more meaningful to get an overall rate of return on all your savings and investments, instead of returns for each investment. You want to know overall how you did during the year, when everything is taken into consideration, your 401k, IRA, regular taxable investments, savings accounts, treasury bills, etc., etc. Did you beat inflation? By how much?

If you have detailed records for each buy and sell, you can gather them up and use the XIRR function in Excel or Google Sheet to calculate the precise rate of return. See this support article from Microsoft for details. But if you have several accounts and you invest every month, getting all those numbers together will be quite time-consuming.

There is a much simpler way to estimate your rate of return. Here’s what you need to do:

1. Define your savings and investment pool.
2. Total the balance in your pool at the beginning of the year (“beginning balance”).
3. Total the amount you put into your pool minus the total amount you took out of your pool during the year (“net in”).
4. Total the balance in your pool at the end of the year (“ending balance”)

That’s it. Just 3 big-picture numbers. Ignore all inter-account transfers — sell one fund, buy another; buy stocks using money in saving account, etc. These all happened within the pool. Ignore all interests, dividends, and capital gain distributions unless you took them out of your investment pool. Ignore all fees and commissions paid from the money in the accounts. If you paid fees outside of your pool, count them in the “net in” number.

Here’s the formula:

return = (ending balance - 0.5 * net in) / (beginning balance + 0.5 * net in) - 1

It’s very easy to remember. It assumes that your total net new investment was invested 50% at the beginning of the year and 50% at the end of the year. Here’s an example:

Beginning balance: $100,000
Net In: $38,000
Ending balance: $150,000

rate of return = ($150,000 – 0.5 * $38,000) / ($100,000 + 0.5 * $38,000) – 1 = $131,000 / $119,000 – 1 = 10.1%

If your “net in” is negative, i.e. you’re withdrawing from your pool, your “net in” is really a “net out.” In that case:

return = (ending balance + 0.5 * net out) / (beginning balance - 0.5 * net out) - 1

For example:

Beginning balance: $150,000
Net Out: $38,000
Ending balance: $120,000

rate of return = ($120,000 + 0.5 * $38,000) / ($150,000 – 0.5 * $38,000) – 1 = $139,000 / $131,000 – 1 = 6.1%

How accurate is this quick and dirty method versus the more time-consuming XIRR method? For me, the difference is only 0.2%. You save a lot of time and get to focus on the big picture: How much did you contribute toward your goal (net in)? How much did you take out from your portfolio (net out)? Did your investments provide an adequate return?