There are a few ways to calculate potential return on your investment: total return, simple return, and compound annual growth rate (CAGR).
Total Return = (Value of investment at the end of the year — Value of investment at the beginning of the year) + Dividends / Value of investment at the beginning of the year
This formula can be used at any time; however, because of that, it doesn’t take into account the value of money over time.
Simple return can be used to calculate your ROI after you’ve sold an investment:
Simple Return = Net Proceeds + Dividends / Cost basis - 1
Similar to total return, simple return does not take the value of money over time into account.
Compound annual growth rate, or CAGR, is best used for investments that have been held for over one year. Unlike the two formulas previously mentioned, CAGR does show the value of money over time.
To calculate CAGR:
- Divide the value of your investment at the end of the period by its value at the beginning of that period
- Raise the result to an exponent of one divided by the number of years
- Subtract one from the result