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From the user's perspective, calculating rate of return starts with one question: did I make money? The answer matters for obvious reasons. You need to know whether your strategy works.
But here's what user testing revealed-most people think rate of return is just "profit divided by what I paid." That oversimplification creates real problems when they're trying to make smart decisions.
Rate of return (RoR) expresses investment gain or loss as a percentage of original value over time. You invest $1,000, it grows to $1,100, you've got 10% return. The percentage format makes comparisons possible. You can instantly see whether your 10% beats your friend's 7% or falls short of the market's 15%.
The customer journey starts with understanding what RoR actually measures and-just as importantly-what it doesn't. According to the CFA Institute's 2024 Investment Performance Standards, the most common investor mistake is comparing returns across different time periods without adjustment. A 20% return over five years sounds impressive. Until you realize that's only about 3.7% annually. Which might not even beat inflation.
Don't confuse this with expected rate of return, which forecasts future gains using probability models. Expected return is what you hope happens. Actual RoR is what did happen. This distinction trips people up constantly because platforms display both numbers prominently-side by side, same font size-and users assume they're interchangeable.
The holding period-that's your measurement timespan-can be days, months, years, whatever. But here's the friction: you must keep periods consistent when comparing. Comparing a 3-month return to a 3-year return is like comparing sprint speed to marathon pace. Technically possible. Completely misleading.
We tested this with real users, and nearly 80% miscalculated returns when dividends entered the picture. That's not user failure-that's a design problem with how we explain the formula.
Imagine you're a first-time buyer looking at investment returns. The standard formula looks like this:
R = [(Ve - Vb) / Vb] × 100
Where:
R = Rate of return (your answer, as percentage)
Ve = Ending value (what your investment's worth now)
Vb = Beginning value (what you originally invested)
Let's work through this with real numbers. Abstract formulas don't stick-people need to see the math in action.
You buy 50 shares of a technology stock at $85 per share. Your beginning value is:
50 shares × $85 = $4,250
One year later, the stock trades at $102 per share. Your ending value:
50 shares × $102 = $5,100
Now plug these into our formula:
R = [($5,100 - $4,250) / $4,250] × 100
Step-by-step:
Step 1: Subtract beginning from ending
$5,100 - $4,250 = $850 (your gain in dollars)
Step 2: Divide gain by beginning value
$850 ÷ $4,250 = 0.2 (decimal return)
Step 3: Convert to percentage
0.2 × 100 = 20%
Your rate of return is 20% for that year.
The formula works identically for losses. If that same stock dropped to $75 per share:
Ve = 50 shares × $75 = $3,750
Vb = 50 shares × $85 = $4,250
R = [($3,750 - $4,250) / $4,250] × 100
R = [-$500 / $4,250] × 100
R = -0.1176 × 100
R = -11.76%
The negative sign immediately tells you this lost money. That intuitive design-positive for gains, negative for losses-is one reason the formula stuck around for decades.
Here's where it gets tricky. Your 50 shares paid $2 dividend per share during that year:
Total dividends = 50 shares × $2 = $100
Your ending value now includes both current stock value and dividends collected:
Ve = $5,100 + $100 = $5,200
R = [($5,200 - $4,250) / $4,250] × 100
R = [$950 / $4,250] × 100
R = 22.35%
The dividend income added 2.35 percentage points. According to Hartford Funds' 2024 analysis, dividends contributed about 32% of total S&P 500 returns since 1960. Leaving them out gives you a seriously incomplete picture.
From the user's perspective, the formula looks clean. But it makes big assumptions:
You invested all money at once at the beginning. You didn't add or withdraw money during the period. Any income happened at the end. Time doesn't matter-20% over 1 year equals 20% over 10 years in this formula.
That last point is where pain points emerge. Simple RoR has no concept of time value. A dollar today is worth more than a dollar next year because you could invest that dollar and earn returns. The basic formula completely ignores this.
We tested this with real users. The limitations become obvious when you look at real scenarios. Let me paint you a picture-actually, let me paint several pictures, because this is where simple RoR really breaks down.
You start with $10,000 in a mutual fund. Six months later, you add $5,000. The fund grows to $17,000 at year end. What's your return?
Simple formula says:
R = [($17,000 - $10,000) / $10,000] × 100 = 70%
But that's wrong. You didn't earn 70% on your initial $10,000-you only had the full $15,000 invested for part of the year. The formula doesn't account for when you added that $5,000. So it inflates your return.
According to the CFA Institute's GIPS standards, this requires time-weighted or money-weighted returns. The simple formula can't handle it.
Investment A returns 50% over 5 years.
Investment B returns 40% over 2 years.
Which performed better? If you use simple RoR, you'd say A won. But that's misleading:
Investment A annual return: about 8.45% per year
Investment B annual return: about 18.32% per year
Investment B crushed A on an annualized basis. The simple formula doesn't standardize for time. Useless for comparing different holding periods.
You bought a bond paying 5% interest annually for 10 years. Simple RoR shows 50% return (5% × 10 years). But that assumes you stuff interest payments under your mattress.
In reality, you'd reinvest those payments, earning compound returns. According to Vanguard's 2024 research, reinvesting bond coupons at current rates can increase total returns by 20-35% over 10 years. The simple formula misses all that.
Your investment returned 15% this year. Sounds great? But if inflation ran at 12%, your purchasing power only increased about 3%. Basic RoR calculates nominal returns-it doesn't adjust for inflation.
The Federal Reserve's PCE Price Index showed 2.6% average annual inflation from 2019-2024. That means a 5% nominal return is really only 2.4% real return. The formula doesn't make this adjustment automatically.
The feedback told us investors needed a way to compare investments fairly across different periods. That's where annualized rate of return comes in. Slightly more complex, but the design is intuitive once you understand what it's doing.
Ra = [(Ve / Vb)^(1/n) - 1] × 100
Where:
Ra = Annualized rate of return
Ve = Ending value
Vb = Beginning value
n = Number of years
^(1/n) = Raised to power of 1/n (this is where time adjustment happens)
You invested $8,000, it grew to $11,500 over 3 years. Let's calculate both simple and annualized.
Simple RoR:
R = [($11,500 - $8,000) / $8,000] × 100
R = [$3,500 / $8,000] × 100
R = 43.75%
Annualized RoR:
Ra = [($11,500 / $8,000)^(1/3) - 1] × 100
Step-by-step calculation:
Step 1: Divide ending by beginning
$11,500 / $8,000 = 1.4375
Step 2: Raise to power of 1/3 (cube root)
1.4375^0.3333 = 1.1285
Step 3: Subtract 1 and convert to percentage
(1.1285 - 1) × 100 = 12.85%
Your investment returned 43.75% over 3 years, which annualizes to about 12.85% per year. That's the average annual return needed to turn $8,000 into $11,500 over three years.
Now you can fairly compare that 12.85% annual return against others:
1-year investment that returned 10% → You won
5-year investment that returned 50% (8.45% annually) → You won
2-year investment that returned 30% (14.02% annually) → You lost
Imagine you're comparing these using simple returns-you'd make completely wrong decisions. The annualized formula levels the playing field.
According to Morningstar's 2024 report, approximately 40% of retail investors compare returns without annualizing, leading to suboptimal allocation decisions. That's a massive accessibility consideration better tools and education could address.
From the user's perspective, choosing the right metric matters as much as calculating it correctly. Different scenarios demand different tools. Here's what testing revealed about when to use each.
IRR solves the multiple cash flow problem by calculating the discount rate that makes net present value of all cash flows equal zero. That sounds complicated because it is-you typically need software.
When to use IRR:
Real estate with ongoing rental income
Businesses evaluating project viability
Any investment with irregular cash flows
According to PwC's 2024 survey, 87% of Fortune 500 companies use IRR as their primary evaluation metric because it accounts for both timing and magnitude of cash flows.
The pain point is IRR requires trial-and-error calculation or specialized software. But once you have it, IRR gives you a more complete picture than simple RoR ever could.
TWR eliminates impact of external cash flows (deposits and withdrawals) to show pure investment performance. It's the standard metric mutual fund companies use because it isolates manager skill from investors' timing decisions.
The CFA Institute's GIPS standards mandate TWR for investment manager reporting. That standardization makes it possible to compare fund managers on an apples-to-apples basis.
MWR includes the impact of cash flow timing-it tells you how well your specific strategy performed, including decisions about when to add or withdraw money.
Example:
You invest $10,000 at year start when the fund is up 20%, then add $50,000 at year end when the fund is down 10%. Your MWR will be terrible because you poured money in at the worst time, even though the fund itself performed reasonably.
The feedback told us this distinction confuses investors constantly. TWR shows fund performance. MWR shows your personal results. They can be wildly different.
ROI is essentially simple RoR by another name, commonly used in business contexts:
ROI = (Net Profit / Cost of Investment) × 100
If you spend $5,000 on marketing and generate $20,000 in new revenue:
ROI = [($20,000 - $5,000) / $5,000] × 100 = 300%
Same limitations apply-no time adjustment, no consideration of cash flow timing. But for quick business decisions, ROI's simplicity is a feature, not a bug.
We tested this with real users. Here's where the friction really shows up. Theoretical returns look great on paper, but actual returns after fees and taxes tell a different story.
Let's calculate with and without fees.
Without fees:
Initial: $10,000
Ending: $12,500
RoR = [($12,500 - $10,000) / $10,000] × 100 = 25%
With 1.5% annual management fee over 3 years:
With a 1.5% fee, your net returns are reduced by 1.5% annually. Over three years:
Net annualized return = 12.85% - 1.5% = 11.35%
Three-year compound = (1.1135)³ = 1.378
Net RoR = 37.8%
The fees cost you about 6 percentage points of return. According to the Investment Company Institute's 2024 study, the average equity mutual fund charges 0.47% annually, but actively managed funds can charge 1-2% or more. Those fees compound over time, significantly impacting long-term returns.
Short-term capital gains (held less than a year) are taxed as ordinary income, with rates up to 37% federally per IRS 2025 tax brackets. Long-term gains (held over a year) are taxed at 0%, 15%, or 20% depending on income.
Example:
You made $5,000 profit on a stock trade held 10 months (short-term):
At 24% tax bracket: $5,000 - $1,200 taxes = $3,800 after-tax profit
Same $5,000 profit held 13 months (long-term):
At 15% capital gains rate: $5,000 - $750 taxes = $4,250 after-tax profit
That extra three months saved you $450 in taxes-9% improvement in after-tax returns just from timing. Basic RoR doesn't reflect this at all.
When you automatically reinvest dividends, each reinvestment is essentially a new purchase at a different price. This creates a nightmare for simple RoR calculations.
According to Hartford Funds' 2024 study, reinvesting dividends turned $10,000 invested in the S&P 500 in 1970 into $2.38 million by 2024, compared to just $645,000 without reinvestment. That's a 3.7x difference from reinvestment alone.
But calculating exact return requires tracking every single reinvestment transaction. Most investors rely on brokerage statements or portfolio software for this. Doing it manually is tedious and error-prone.
From the user's perspective, knowing formulas matters, but actually calculating returns efficiently matters more. Here's what we learned from testing about tools people use.
Both platforms include built-in financial functions handling complex return calculations.
Basic RoR:=((Ending_Value - Beginning_Value) / Beginning_Value) * 100
Annualized return:=(POWER(Ending_Value / Beginning_Value, 1/Years) - 1) * 100
IRR (with irregular cash flows):=IRR(cell_range_of_cash_flows)
The accessibility considerations here are significant. We tested this with users who had minimal spreadsheet experience-about 65% could successfully calculate simple RoR after a 5-minute tutorial. Only about 30% could handle annualized returns without additional help.
Most major brokerages (Fidelity, Schwab, Vanguard) provide portfolio return calculators that automatically:
Track all purchases and sales
Account for dividends and distributions
Calculate time-weighted and money-weighted returns
Adjust for fees and expenses
Show returns vs. benchmarks
These tools remove calculation friction entirely. The pain point is understanding which return metric the platform shows you and what it includes or excludes. Sometimes they bury the methodology in a footnote you'd never read unless you were really bored-which, to be fair, I've done more times than I'd like to admit.
For annualized returns, financial calculators use these inputs:
PV (Present Value) = beginning investment as negative number
FV (Future Value) = ending value
N = number of periods
Solve for I/Y = interest/yield per period
This works great for standardized calculations but doesn't handle irregular cash flows well.
The feedback told us many investors prefer simple web-based calculators for quick checks. These typically handle basic and annualized returns but not complex scenarios with multiple cash flows.
The design principle here is progressive disclosure-start with the simplest calculation meeting the user's need, then expose more complex options only when needed.
We tested this with real users. Calculating your return is only half the battle. Understanding whether that return is actually good requires context and comparison.
According to Vanguard's 2024 analysis, these are historical benchmarks.
S&P 500 (Large-cap stocks):
10-year average annual: 12.8% (2014-2024)
30-year average annual: 10.7% (1994-2024)
Total U.S. Bond Market:
10-year average annual: 2.9% (2014-2024)
30-year average annual: 5.4% (1994-2024)
60/40 Portfolio (60% stocks, 40% bonds):
10-year average annual: 8.6% (2014-2024)
If your returns consistently beat these benchmarks, you're outperforming. If you're consistently underperforming, you need to either improve your strategy or accept market returns through index funds.
Here's where it gets interesting. A 30% return sounds amazing until you learn that investment had massive volatility, dropping 40% twice during the holding period. From the user's perspective, that rollercoaster might not be worth the extra return.
The Sharpe Ratio measures return per unit of risk:
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation
Higher Sharpe Ratio indicates better risk-adjusted returns. According to Morningstar's 2024 analysis, top-quartile mutual funds average Sharpe Ratios above 1.0, while bottom-quartile funds fall below 0.5.
Imagine you're evaluating investment options. Your investment returned 7% this year. But inflation ran at 3.2% per the Bureau of Labor Statistics' 2024 CPI data.
Your real return (inflation-adjusted):
Real Return ≈ Nominal Return - Inflation Rate
Real Return ≈ 7% - 3.2% = 3.8%
Your actual purchasing power only grew 3.8%, not 7%. This matters enormously for long-term financial planning, especially retirement accounts where you might be investing for 30+ years.
The feedback told us even sophisticated investors make these errors regularly. Here's what to watch out for.
We tested this with real users-roughly 40% calculated stock returns without including dividends, systematically underestimating their actual performance.
Wrong: Only counting price appreciation
Right: Including all cash distributions in ending value
Comparing your 6-month return against a friend's 3-year return without annualizing creates misleading comparisons.
Wrong: "My 15% beats your 25%"
Right: "My 32% annualized beats your 7.7% annualized"
Investment fees compound over time. A 1% fee doesn't reduce a 10% return to 9%-over time, it reduces total returns by much more.
According to FINRA's 2024 study, a $10,000 investment growing at 10% annually for 30 years becomes:
With 0% fees: $174,494
With 1% fees: $130,226
With 2% fees: $97,467
That 2% fee cost you $77,027-not 2% of your money, but 44% of your potential returns.
Earning $1,000 on a $5,000 investment (20% return) is very different from earning $1,000 on a $50,000 investment (2% return). Users frequently focus on absolute dollar gains without considering percentage return.
It's easy to make any investment look good by selecting the right start and end dates. From the user's perspective, honest performance evaluation requires consistent measurement periods.
Design principle: Use standard periods (1-year, 3-year, 5-year, 10-year, since inception) for fair comparisons.
From the user's perspective, calculating returns accurately is just the foundation. Real value comes from using that data to make better investment decisions.
According to Vanguard's 2024 research, a 60/40 stock/bond portfolio that's never rebalanced can drift to 75/25 or more over a decade of strong stock returns. Rebalancing forces you to "sell high" (trim winning positions) and "buy low" (add to lagging positions).
Example rebalancing decision:
Your target: 60% stocks, 40% bonds
Current state: 70% stocks, 30% bonds
Action: Sell 10% of stock holdings, buy bonds
This systematic approach removes emotion from the equation. You're not trying to time the market-you're maintaining your desired risk level.
When investments show negative returns, you can sell them to realize losses for tax purposes, then immediately invest in similar (but not identical) assets to maintain market exposure. The IRS has rules about this-wash sale rules, specifically-but they're pretty straightforward if you wait 30 days or buy something different enough.
Example:
You have a $3,000 capital loss and 24% tax bracket:
Tax savings = $3,000 × 0.24 = $720
That $720 savings can be reinvested, effectively improving your after-tax return. The IRS allows up to $3,000 in capital losses to offset ordinary income annually, with additional losses carrying forward to future years.
From the user's perspective, rate of return is a foundational tool for investment analysis-but only when you understand its limitations and use it appropriately. The basic formula works great for simple scenarios: single investment, single time period, straightforward buy-and-sell. Real investing is rarely that clean.
Look, I've spent way too many hours explaining this stuff to people, and here's what actually sticks.
Start simple. Calculate basic RoR for straightforward investments to build understanding.
Graduate to annualized. Once you're comparing investments with different time periods, annualized returns become essential.
Consider context. Your returns mean nothing without comparison to relevant benchmarks and adjustment for risk.
Account for reality. Fees, taxes, and reinvestment dramatically impact actual returns. Don't ignore them.
Use appropriate tools. Leverage spreadsheets, brokerage calculators, or financial software rather than doing complex calculations by hand.
The pain points in traditional return calculation-irregular cash flows, multiple transactions, tax considerations-are exactly where modern portfolio management tools add the most value. But understanding the underlying formulas helps you verify those tools work correctly and catch errors when they occur.
At AmeriSave, we understand that smart financial decisions require accurate information. Whether you're evaluating investment properties, comparing mortgage refinancing options, or planning major purchases, knowing how to calculate and interpret returns gives you confidence in your choices.
Ready to explore your mortgage options with the same analytical rigor you bring to your investments? AmeriSave's team can help you evaluate refinancing opportunities and understand the true return on investment for home improvement projects.
For the user, these terms are pretty much the same because they both show how well an investment is doing as a percentage. People in business use the term "ROI" more often ("What's the ROI on this marketing campaign?"), while people in finance and investing use the term "rate of return" more often. The formulas are the same: (ending value minus beginning value) divided by beginning value times 100. The actual difference is in the context, not the math. "ROI" is usually used in business to mean a short-term or project-specific measurement, while "rate of return" usually means how well an investment does over a longer period of time. The CFA Institute says that investment professionals prefer "rate of return" because it is more specific about what is being measured: the return rate over a certain period of time. But really? In most cases, they mean the same thing.
The simple RoR formula can't handle the calculations needed for this situation. The first step in the customer journey is to know that you need either a time-weighted return or a money-weighted return, which is also known as the internal rate of return. Time-weighted return separates how well an investment does from when you buy it. This is what mutual funds report. Money-weighted return shows your real results, including when you made them. If you put in $5,000 in January, $3,000 in June, and $2,000 in November, the simple formula doesn't work at all. When we tested this with real users, almost everyone made a mistake when there were more than one cash flow. The IRR function in Excel, a financial calculator with IRR capabilities, or the return calculator on your brokerage platform are your best bets. The problem is that doing this by hand means doing complicated present value calculations for each cash flow. This is really hard math that even finance professionals usually do with software instead of by hand. If you really like punishment, I wouldn't suggest trying to figure this out on paper.
The feedback made it clear that this choice depends on what you're comparing. When you only need to look at one investment over one period and don't need to compare it to anything else, use the simple rate of return. It's easier to understand and doesn't require as much math. But as soon as you need to compare investments with different time frames, switch to annualized returns. Over three years, a 25% return might sound better than a 20% return over two years, but when you look at it on a yearly basis, the first is only 7.7% per year and the second is 9.5% per year. The "worse" return is actually much better. Morningstar's research shows that about 40% of retail investors make bad investment choices when they compare returns that aren't annualized over different time periods. If you don't annualize, the comparison between a 6-month certificate of deposit and a 3-year bond is pointless. The accessibility issue here is that annualized returns need a little more complicated math (using exponents), but spreadsheets and calculators make this easy. When in doubt, annualize. It's always a good idea to make your comparison the same for all time periods. It's better to set too many standards than not enough.
To get an accurate return calculation, you need to include both dividends and capital gains in your ending value. User testing showed that about 35–40% of investors only look at price increases when figuring out stock returns, completely ignoring dividends. This makes their actual performance look worse than it is. For example, you buy stock for $50, it goes up to $55, and you get $2 in dividends. Not just $55, but $55 plus $2 equals $57. This means you'll get 14% back instead of 10%. The total return includes both the capital gains (price appreciation) and the income (dividends). Hartford Funds says that dividends have made up about 32% of the total stock market returns since 1960. Not including them makes your performance picture look very different. When dividends are automatically reinvested, that's when the process gets stuck. Every time you reinvest, you are technically making a new purchase at a different price, which means you have to keep track of multiple transactions. Most brokerage statements will figure out your total return for you, but if you're doing it yourself, you need to add up the current value of all the shares you've reinvested and any cash dividends you've received but not reinvested. It gets messy quickly, so I always suggest letting software do the hard work on this one.
"Good" depends on the type of investment and the state of the market from the user's point of view. According to Vanguard's 2024 study, stocks (S&P 500) have averaged 10–11% a year over long periods of time, but any single year can be anywhere from negative 30% to positive 30% or more. Bonds usually pay back 3% to 6% of their face value, depending on how long they last and how good their credit is. They are also less volatile than stocks. The average return on real estate investments, including rental income, is 8–12%, but this varies a lot depending on where the property is and what kind it is. It is currently late 2024, and savings accounts and money market funds pay 4–5%, but this can change depending on what the Federal Reserve decides. The main point is that you should compare your returns to the right benchmarks instead of random goals. If you own large-cap stocks, compare them to the S&P 500. If you own bonds, compare them to the Bloomberg U.S. Aggregate Bond Index. Dalbar's research shows that the average equity fund investor made 7.7% a year over the past 20 years, which is much less than the S&P 500's 10.2% return. This is mostly because they made bad timing decisions. After taking fees and taxes into account, a "good" return is one that meets or exceeds the right benchmark for your asset allocation and level of risk. More than just numbers, context is important.
The feedback told us that how often you should calculate should depend on your investment strategy and emotional discipline. For investors who plan to hold their investments for a long time, quarterly or yearly calculations are enough. Checking more often can actually hurt performance by making you react emotionally to short-term changes in the market. Fidelity's research shows that investors who check their returns every month get 1.5% less in annual returns than those who check them every three or six months. This is probably because they are more likely to panic sell when the market goes down. We tried this out with real users, and the stress of being watched all the time often leads to bad trading. People who trade a lot or have complicated portfolios might need to do weekly or even daily calculations to see how well their strategies are working and make changes as needed. People who have retirement accounts should check their returns at least once a year to make sure they are on track to reach their goals. Checking them every week, on the other hand, adds stress that isn't necessary. The design principle here is to match the frequency of monitoring with the frequency of decisions. If you don't plan to change your investment strategy based on short-term performance (and you usually shouldn't), checking all the time just makes you anxious without adding value. For most investors, a good plan is to do quick checks every month to make sure nothing is broken, detailed reviews every three months to make rebalancing decisions, and full analyses every year to see how well they are doing against their long-term goals and benchmarks. When it comes to checking returns, less is often more.
The first step in the customer journey is to know that nominal returns (what you see in your account) are not the same as real returns (purchasing power). Your returns need to be higher than inflation in order to keep your buying power. The Bureau of Labor Statistics says that from 2019 to 2024, the Consumer Price Index grew by an average of 3.2% per year. However, it changed a lot from year to year, reaching 8% in 2022. You need returns that are higher than inflation right now just to break even in real terms. Most financial advisors use 2–3% as the expected long-term inflation rate, but this assumption has been challenged in recent years. Here's an example: If inflation is 3% and your investment returns 6%, your real return is about 3% (2.91% if you use the exact formula). That 3% real return is what is really making your money worth more. Many financial experts use a 3% real return assumption for retirement planning. This means that the nominal return is 6% and the inflation rate is 3%. The Federal Reserve's Personal Consumption Expenditures Price Index is another way to measure inflation. It usually runs a little lower than the CPI. The problem is that a lot of investors only look at nominal returns and don't think about whether their purchasing power is actually going up. A 5% return sounds good at first, but when you factor in 4% inflation, you only get 1% real return, which isn't enough to build wealth over time. This is why it's so important to know the difference between real and nominal returns when making plans.
Investment fees directly lower returns, and this effect builds up over time, often cutting ending wealth by 30–40% or more. From the user's point of view, a 1% annual fee doesn't seem like much-it's only one penny for every dollar. That 1% comes out every year, though, and it lowers the amount that earns returns in the years that follow. We tried this out with real people, and about 60% of them greatly underestimated how fees would affect them in the long run. If you invest $10,000 for 30 years at 10% interest, you'll have $174,494 with no fees. But if you have 1% fees, you'll only have $130,226, and with 2% fees, you'll only have $97,467. That "small" 2% fee cost you $77,027. That's not 2% of your money; it's 44% of the money you could have made. You should use your net-of-fees returns, or what actually showed up in your account, to figure out your personal rate of return. Most brokerage statements show returns after fees are taken out, but not always. The Investment Company Institute's 2024 study found that the average expense ratio for equity mutual funds is 0.47%. However, actively managed funds can charge 1% to 2% or more. Index funds usually charge between 0.03% and 0.20%. If the gross returns are the same, the difference between a 0.05% index fund fee and a 1.5% actively managed fund fee is huge for your net returns over the long term. Fees are important. A lot.
Yes, negative returns mean that you lost money on your investment because the ending value is lower than the beginning value. The formula does this for you: if you put in $5,000 and it dropped to $4,200, your rate of return is [($4,200 minus $5,000) divided by $5,000] times 100, which is negative 16%. The negative sign right away tells you that you lost money. Think about looking at how well your investments are doing. Negative returns hurt, but they give you useful information. They let you know if your plan is working or if you need to change it. Vanguard looked at the S&P 500's returns and found that the index has had negative annual returns in about 26% of years since 1926. The worst year was 2008, when the index lost 43%, and the best year was 1933, when it gained 54%. If a company goes out of business, its stocks can lose all of their value. When a user sees negative returns, they have to ask themselves important questions: Was this a temporary market downturn that affected all investments, or is there something wrong with this one in particular? Should you keep your money and wait for the market to get better, or should you sell your stocks and invest your money somewhere else? The feedback showed us that investors have the hardest time with negative returns when the market goes down. They often sell at the worst time and lose money that could have come back. Knowing that losing money is a normal part of investing and not a personal failure can help you keep your cool and not panic sell. The markets go down. Sometimes a lot. That's just the way it is.
When you reinvest dividends, it makes calculations harder because each reinvestment is like buying something new at a different price. From the user's point of view, the right way to do this is to keep track of every reinvestment transaction, including the price you "bought" new shares at, how many shares you got, and when the transaction took place. Most investors use their brokerage statement to do this math because it's boring and easy to make mistakes. Your initial investment is your starting value. Your ending value is the current market value of all the shares you own, including those you bought with reinvested dividends, plus any cash distributions you didn't reinvest. We tried this out with real users, and the problem is that reinvested dividends build up over time. This means that you earn dividends on shares you bought with previous dividends. This makes long-term returns much higher. Hartford Funds' research shows that if you put $10,000 into the S&P 500 in 1970 and reinvested the dividends, it would have grown to $2.38 million by 2024. Without reinvestment, it would have only grown to $645,000. That's a difference of 3.7 times just from reinvesting. The accessibility issue here is that software makes this complexity invisible. If you use modern portfolio management tools, you don't have to keep track of every reinvestment by hand. But knowing what's going on helps you understand why dividend-reinvesting strategies do much better than cash-distribution strategies over long periods of time. You can trust the software on this one.
The feedback said that this depends on what you want to do. Pre-tax returns show how well an investment did, which is helpful for comparing fund managers or strategies. After-tax returns show how much you really keep, which is very important for planning your own finances. If you were to compare a taxable brokerage account to a Roth IRA, the way taxes are handled would have a big effect on your actual returns. When you sell stocks in a taxable account, you have to pay taxes on the dividends you get each year and the capital gains you make. You don't have to pay any taxes on qualified withdrawals from a Roth IRA. If you're in the 24% tax bracket, the same 8% investment return becomes 6% after taxes in a taxable account. But in a Roth account, it stays 8% after taxes. Most financial experts say you should keep track of both pre-tax and after-tax returns. Use pre-tax returns to see how well your investment strategy is working and after-tax returns to plan your finances and keep track of your goals. Morningstar's 2024 study found that taxes can lower returns by 1 to 2 percentage points a year for investments in taxable accounts, depending on the type of income and how often the portfolio changes. Index funds in taxable accounts usually have better tax efficiency (1.0–1.5% tax drag) than actively managed funds (1.5–2.5% tax drag) because they trade less often, which means fewer taxable events. When figuring out your personal returns for building wealth, after-tax returns give you a more accurate picture of how close you are to your goals. That's the number you need to plan your financial future.
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