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What Is Your Personal Rate of Return?

Your personal rate of return measures the success of your individual investments or portfolio. You can use your personal rate of return to evaluate your performance and adjust your strategy (if need be).

Personal rate of return, explained

A rate of return (ROR) is simply the net gain or loss on an investment in a specified period. Whereas a positive ROR signifies profits, a negative ROR indicates a loss. You can calculate your personal ROR on individual assets or your whole portfolio. 

Investment vs. investor returns

Many brokerage and investment apps calculate your ROR for you. However, your personal rate of return may differ from the number on your screen. 

One reason for the difference is the distinction between investment and investor returns. 

When funds or brokerages calculate ROR, they often assume that you invest a lump sum at the start of the calculated period. In other words, your fund will report the same ROR whether you invest $1,200 in January or $100 a month all year. 

While the ROR for the fund may be accurate, your personal rate of return may differ if you trade throughout the period. 

Ways to calculate your personal rate of return

Your personal rate of return measures how your portfolio performs. A comprehensive ROR will consider all factors that affect your returns, including cash flow, timing, dividends or interest earned and fees. 

Simple ROR

Perhaps the easiest ROR calculation is your ROI, or return on investment. The calculation is simple:

Simple rate of return = [(current value – initial value) / initial value] x100%

Though a good start, it doesn’t consider cash flow, profits or the time value of money. That’s not necessarily a problem for individual investors who just want to know how much money they’ve made, but it’s not accurate enough for investment funds to use.

Internal rate of return (IRR)

IRR (internal rate of return) is one of the most accurate measures of ROR. Sometimes called the dollar-weighted ROR, it considers fund performance as well as the size and timing of cash flows. 

Time-weighted returns (TWR)

You can also calculate your time-weighted rate of return, which measures a portfolio’s compound growth rate weighted based on the timing of contributions or withdrawals. Though the calculation is simpler than IRR, it’s best suited for measuring fund (rather than portfolio) performance. 

Calculating your personal rate of return

To calculate your IRR, you’ll need the following data for the given period (usually a year):

  • Your ending balance from the preceding period
  • Your ending balance for the current period
  • The date(s) and amount(s) you invested
  • Any withdrawals or fees taken

While you can calculate IRR by hand, the formula is fairly complex. As such, plugging your data into Excel or an online calculator with built-in IRR formulas is typically quicker. 

What this means for you

Your personal rate of return measures your portfolio’s performance, allowing you to evaluate your gains against funds, benchmark indexes or your own goals. However, calculating your personal rate of return requires a hefty formula and plenty of time.

Fortunately, Q.ai has your back. We calculate your personal rate of return for you, so you don’t have to worry about the nitty-gritty details. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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