# How To Calculate Your Rate of Return

Calculating my rate of return (ROR) has been nagging at me for a while now but recently I decided to get setup to properly calculate my ROR. It’s an important number to have on hand to understand the performance of your portfolio.

I have never been happy with the ROR calculation of Quicken and always questioned the numbers. More importantly, how do you calculate the ROR with your shares re-invested? I am sure there is a generally accepted accounting procedure for the ROR and I know there is one from a tax perspective but I have decided to follow the following rules:

• It’s based on the money I invest and not the shares I purchase
• It’s based on the value of the account including cash and not the value of the shares
• Stock investments, mutual funds or even GICs are a mean to increase the overall value

Related: How To Review Your Financial Plan

Let’s define how you assess your profit. I think it’s important to understand how to calculate your profit since it can be calculated differently and the total value of your portfolio takes into account your profit.

### Profits with GIC

profit = (principal + interest) – principal where the principal is your initial amount and the interest is what you earn from your investments.

### Profits with Stocks

profit = (principal + capital gains) – principal where the principal is your initial investment and the capital gains is the profit (or loss) from your investment. You capital gain is defined by the following formula: shares count * (market value – purchase price). If you sold the stock then it’s the sell price otherwise it’s a paper capital gain.

### Profits with Dividend Stocks

profit = (principal + capital gains + dividends) – principal. The same definition as above apply with the addition of the dividends you have earned. The principal would be the initial share purchase times the purchase price and the capital gains would be calculated with the initial share count as well. The dividends would be from the dividends earned (even if they are re-invested).

* I kept this one for last as in a tax free account, the gains is simple but in a non-registered account you have to take into account the taxes you have to pay. I am however keeping it simple right now and disregarding the taxes.

## Simple Way To Calculate ROR

For the longest time, I thought I needed to track all my transactions to get an accurate picture and that’s a lot of work. Let’s just be realistic. With dividends coming in every month and some of them DRIPing, the accounting of every transactions across multiple accounts become quite a chore.

I needed to think about it differently and ignore the actual investments I have. It’s like a black box inside and I focus on the money I put in and how much it’s worth overall. Some of it is invested and some of it is in cash. All the matters are the following:

• When and how much is invested
• The total worth of the account

I decided to manage it by account but you could do it for your overall portfolio since you have the transactions for each account. The trick is simple as all you need to do is use the XIRR function of Excel or Google Spreadsheet. Let’s use the TFSA as an example since most will be familiar with the account. The total for the day is simply using today’s date and my total value of the account as a negative value. It has to be negative for the XIRR formula to work.

I basically have an annualized return of 15.88% in my TFSA account. The annualized return gives me a different perspective on my investment compared with the fact that I have a 57.09% profit on my investments. I hope to double it within 7 years and to do that I need at least 10% annually. If you withdraw from your TFSA, just enter is as a withdrawal with the appropriate transaction date and your annualized return will adjust accordingly. What I have done is track the amount of money I put in the account as opposed to the individual investments and it’s much simpler that way.

Image courtesy of cooldesign / FreeDigitalPhotos.net

• Erich

I appreciate you sharing this method, I need to add it to my existing value calculations. I agree it’s a big hassle tracking every transaction, but so far I’m willing to do that with all my DRIP accounts to have an accurate ACB when I transfer in kind to my TFSA. My methods show me my yield on average cost (calculated based on my ACB/share) for each DRIP position, and my overall annual dividends and dividend growth, but I had not even sorted out how I would calculate total ROR. I like your simple method.

Though dividend taxes will make my totals a little inaccurate, I won’t hold DRIP holdings large enough for dividend taxes to make a measurable difference in long term total return so I’m not too worried about that.

• @Erich
I am happy that you found it useful

It’s a lot of manual accounting that I decided not to include my DRIP transactions in my process. I am also not sure how it helps me understand the performance of my account as opposed to understand the performance of the investment. The investment is relatively easy to understand the performance since the data is all public. However, I do have the transactions as I enter them in Google Finance but it’s not in my spreadsheet.

What do you do with the yield on ACB?

• Erich

I use my yield on ACB for DRIP holdings because for some companies I am likely only ever going to purchase via DRIP and SPP, so this will give me incentive to remain a buy-and-hold investor by seeing what my yield on cost becomes with future dividend growth. If you don’t keep track of your yield on cost for a given position, you are missing out on seeing how much % in dividends you are getting paid long-term for the money you spent long ago. this is particularly important for high dividend growth companies that start with lower dividend yields, I can see how they can surpass lower-growth high yield investments long term and be very happy I held those companies for so long.

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