The return on investment (ROI) represents how well an investment is doing. Because the ROI is normally stated as a percentage, you can use it to compare how well your different investments are doing even if the actual dollar amounts are quite different from one another. The return on investment percentage can help you to decide which of your investments you might want to add to and which are doing poorly enough that you should get rid of them. Determining ROI can get extremely complicated and involved, but a simple straight-line calculation can help you take a look at how your investments are doing.
Identify the cost of the investment. This will be your actual investment amount, including any fees related to managing the investment, such as management fees or cost of acquisition.
Determine the income your investment makes for you during the month. Include interest earnings but also overall increases in value, dividend payments or other sources of income. If you don’t get a monthly income report, you can use the average monthly income amount. To determine this, take the amount of income earned for a year and divide by 12.
Figure your monthly return on investment by dividing your net profit by the cost of the investment. Multiply the result by 100 to convert the number to a percentage. As an example, if you have made a $2,000 investment that brings you $100 in income in a month, divide $100 by $2,000, which gives you 0.05, and then multiply that number by 100 to see that you had a 5 percent return on investment for the month. If that same $2,000 investment brings you $200 the next month, the result is an ROI of 10 percent.
Return on investment is commonly figured as an annual number. You can use the same formula to determine your annual ROI, or you can add the monthly ROI results together and then divide by 12 to come up with your average monthly ROI for the year.
Simple ROI calculations are a helpful way to take a look at how your investments are doing, but the numbers can sometimes be misleading, and the system used to make the ROI calculations can significantly impact the outcome. For example, if you look at the ROI for a period of two years on a certain investment, you may find that the first year your investment doubled in value and the next year it lost all of the gains and returned to its original value. Figured as a simple arithmetic return, these changes can show up as a 25 percent ROI, even though you have actually not gained any money. A compounded return, however, would report this accurately and give your ROI as 0 percent. Figuring a monthly ROI will also help you to get an accurate picture of your finances.
- Ablestock.com/AbleStock.com/Getty Images