How to Calculate the Rate of Return on an Investment Policy Statement
Investment vehicles are measured against each other by determining their rate of return, also called return on investment or ROI. ROI is a percentage figure measuring the income generated from an investment versus the amount of money in the investment itself. Many investments have fluctuating ROI based on underlying market forces, such as the volatility of the stock market, and can lose value as well as increase. ROI is best determined over a long period of time to even out these fluctuations.
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Instructions
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Determine the amount of money in the investment at the beginning of the investment period in the statement. This is called the capital.
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Calculate the amount of money the investment earned over the period reported on the statement. This is the total income of the investment, minus any fees or debits against the account incurred by the investment managers. Note that withdrawals from the account do not count against rate of return.
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Divide the earnings by the initial amount of capital. This is the rate of return for the investment period.
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Multiply the rate of return by the number of investment periods in a year to determine the simple annual rate of return. For example, if this is a monthly statement, and you earned 0.5 percent on your investment, your simple rate of return is 6 percent over the course of one year. A five-year summary statement, on the other hand, would be divided by five to determine your simple rate of return.
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Use more complicated math to determine the actual return if the earnings from the investment are reinvested. This is called compound interest, where future earnings are paid against ever-increasing investment capital. The formula is (1 + return)^(periods per year). In the above example, a 0.5 percent monthly return is (1 + 0.005) to the 12th power, or 6.17 percent per year. Compound return will always be higher than simple return on investment.
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References
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