Happy New Year! Now that 2006 is over, it’s time to see how our investments did last year. You can look up the performance numbers online or in newspapers, but if you bought or sold during the year, those numbers won’t match *your own* rate of return because the numbers online or in the paper assumes a) a single investment at the beginning of the year; and b) held until the end of the year with no additional deposits or withdrawals. Plus, 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 OpenOffice to calculate the precise rate of return. See this post by JLP 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 for doing the estimate:

- Define your savings and investment pool
- Total balance in your pool at the beginning of the year (“beginning balance”)
- Total amount you put into your pool minus total amount you took out of your pool during the year (“net in”)
- Total 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, capital gains distribution, 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 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%

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)? Did your savings and investments provide adequate return?

Anonymous says

Hi,

Thanks for the great information. Now, do you have a simplified formula for calculating personal rate of return for multiple years? For example, what is my personal rate of return from 1998 to 2006? I assume the formula you presented here won’t work correctly beyond one year period.

Thanks!

Harry Sit says

This simple formula actually works for both a single year and multiple years, provided that your net investments are roughly even during those years. I will do a follow up post later.

Harry Sit says

Here’s a follow-up post for applying the simple formula to multiple years:

Estimate Your Personal Rate of Return for Multiple Years

401kStumped says

Hi,

I’ve been trying to figure out how my Fidelty 401k could show a net market value loss of $80 and still say that I have a ROR of positive 1.2%. I tried your formula and also the XIRR formula in Excel. Results still don’t make sense. Any idea where there might be a post on how Fidelty calculates their 401k ROR’s?

Thanks

reunificacion deudas says

It is really a nice post, its always great reading such posts, this post is good in regards of both knowledge as well as information.. These all happened within the pool. Ignore all interests, dividends, capital gains distribution, unless you took them out of your investment pool. Thanks for the post.