A rate of return (ROI) is the monetary profit or loss of an initial investment over a defined period of time, usually in terms of dollars. When calculating the ROI, you are basically determining the amount of money that a person or business makes over time, after all the costs have been deducted. It is an essential part to any financial planning, since it indicates whether or not the money spent will be more than the money made. A company’s or business’ annual return on investment (ROI) is obviously the most basic and most obvious example. But the term “rate of return” can also apply to any financial concept – a calculation, for example, regarding what your life expectancy will be after you have reached a certain age, or what the value of a certain property would be at some point in the future. In these cases, a specific figure like the ROI is actually a good starting point, rather than a blanket average.
The standard deviation, which compares the sum of individual investment returns over time, is another useful tool for evaluating return on investment. The deviation is used to compare changes in standard deviation with changes in the average returns over the long-term period. The standard deviation is different from the standard deviation in that it takes into account the number of periods studied, instead of simply averaging the results over all periods studied. This allows for more accurate evaluation.
Another useful calculator is the compounding factor. By inputting a few numbers, such as the current balance of your account, and the amount you expect to invest over the next ten years, you can calculate your compounding effect. For example, if you expect to make two payments per year to your retirement account, then your annual compounded return will be two percent. If you were to calculate this feature using only annual average returns, then you would get a much different result. By varying your inputs, you can see how changing any one factor can significantly impact your annual return on investment.
The beta or gamma distribution is used to evaluate overall performance over time. The beta distribution is based on the arithmetic mean of expected returns over the included sub-periods. By varying the number of sub-periods and the rate of return expected over those sub-periods, the beta distribution can give a range of possible outcomes, rather than a single outcome. Using the gamma distribution, the result from each sub-period is multiplied by the standard deviation to give the result over the cumulative total. The result from the gamma distribution can give you a general idea of what your final value will be over time, but you should use a more sophisticated model for your individual investments.
The logistic or exponential distribution compares your initial investment, the rate of return you wish to achieve, and the size of your investment over time. You must first choose a fixed initial value and then assume that your investment will grow in line with the current stock or real estate markets. After your initial period of time, your investment will continue to grow according to the logistic function, but it will stop growing when the number of successive periods required to reach your target rate of return falls below your threshold. If your investment falls below the threshold, your cumulative return will fall below the logistic value. This is a measure of risk tolerance: if your cumulative return falls below the threshold, your money management strategy should still allow for a small amount of loss.
The delta distribution deals with the potential for profit declines over time. It evaluates the difference between the initial value of your investment and the current value. It differs from the logit function by assuming that the sum of changes in your portfolio over time is constant. This makes the delta distribution slightly more sensitive to shocks to your portfolio, but it has a much better accuracy than either the logit function or the gamma distribution.
I use the spreadsheet program Quicken to track my portfolio’s performance. To calculate the value of your ROI, you should add your investment fees as well as your net income from sources like leases, investments, rental income, and dividends to your annual cost of capital. Then divide your annual cost of capital by your current asset value in order to get your capital gains rate. Your capital gains rate tells your annual return per dollar. In order to edit your portfolio to achieve the best return per dollar, you need to evaluate your individual investments periodically.
Your portfolio is designed so that most of your returns are realized from interest payments, with some portion coming from dividends, and the rest coming from capital gains or net worth. A good rule of thumb is that if half your investments are in interest-bearing securities like CDs, bonds, and savings accounts, the other half should be in money market accounts. Dividing the annual interest from your account balance by the total capitalization of each category of interest, you have shows how your compounded interest is distributed between the securities that you hold. If your investments show a negative balance, your account is losing money.