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Author: Fauzi Zamir
Article source: http://articlemecca.com/. Used with author's permission.
Every investor should know how well their investments are performing. One way to evaluate performance is to calculate your return on investment (ROI) and compare it to a market index. The problem is that most financial institutions do not provide personal rates of return (ROI) on their Statements and doing the calculations yourself is not easy, particularly when you have contributions or withdrawals during a period.
Why is tracking your ROI important? Let?s use an analogy. You know how much you make. You also probably know if your salary is comparable to people with similar jobs. Knowing these facts i.e. having a reference point to compare your own salary to others lets you determine if you are being fairly compensated. In the same way, it is equally important for you to know not only what all your investments are worth but also what returns they have earned and how those returns compare with a benchmark such as a market index (the Dow, S&P 500 etc.)
What is ROI? In its simplest form it is the rate of return earned on an investment. For example, if you put $1,000 in a bank account and you earned $50 of interest by the end of the year, your ROI would be 5%. The calculation gets more complex when:
- You have multiple portfolios at different financial institutions and you want to calculate individual portfolio returns or a rate of return for all your portfolios on a combined basis.
- You have made contributions or withdrawals during the calculation period which then have to be weighted for accurate return calculations.
- You don?t have access to Index rates of returns for comparison purposes.
How do you determine how well your investments are performing? You need to consider three factors as follows:
Amount Invested
- If you invested $100,000 and earned $1,000, your ROI is 1%.
- But if you invested $10,000 and still earned $1,000, your ROI is 10%.
Time Period
- If you invested $100,000 and earned $1,000 after 5 years, your ROI is 0.2%.
- But if you invested $100,000 and earned $1,000 after one year, your ROI is 10%.
Comparable Return
- If your investments earned 10% but a comparable market index such as the S&P 500 return was 18% you didn?t do as well as the market in general.
- Similarly if your investments earned only 4% but the market return was 2%, you did well.
Knowing how well your investments have performed relative to the market over a long period of time is a key step in managing your investments in an intelligent manner. Empowered with this information you can evaluate whether you need to make changes and maximize your returns relative to the risk you are comfortable with. Fauzi Zamir is a chartered accountant and founder of Solutionera Inc. which has developed a web-site that allows investors to easily track, calculate and compare their ROIs against market indexes without having to do the complex mathematical calculations. You can visit the site at:
whatismyroi
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