How to calculate investment returns

Hypothetical examples. The numbers below are made up to show the math. They are not predictions, and they do not represent any real investment. Past performance does not guarantee future results.

1. Simple (total) return

Formula: (Ending value − Starting value + Income received) ÷ Starting value.

Example: you start with $10,000 and end with $14,000 with no income or added money. Return = ($14,000 − $10,000) ÷ $10,000 = 40%. Simple return ignores how long it took, which is why it can mislead.

2. Annualized return (CAGR)

Formula: (Ending ÷ Starting)^1/years − 1. CAGR is the steady yearly rate that would produce the same ending value. It smooths out the ups and downs.

Example: $10,000 growing to $14,000 over 5 years: ($14,000 ÷ $10,000)^1/5 − 1 ≈ 7.0% per year. The same 40% total over 10 years would be only about 3.4% per year.

3. Time-weighted vs. money-weighted return

When you add or withdraw money, there are two common ways to measure performance:

• Time-weighted return (TWR) chains together the returns of each period, ignoring the size and timing of your deposits. It measures the investment, and is the usual way funds report performance.
• Money-weighted return (MWR, similar to IRR) accounts for when your money went in and out, so it measures your own experience, including the timing of your decisions.

Example: you invest $10,000. In year 1 the investment gains 20%, so you have $12,000. You add $10,000 (now $22,000). In year 2 it falls 10%, ending at $19,800.

• TWR: 1.20 × 0.90 − 1 = +8% over two years, or about 3.92% per year.
• MWR: you put in $20,000 in total and ended with $19,800, with most of the money invested before the loss. Solving for the rate that fits the cash flows gives about -0.67% per year.

Same investment, different answers, because the second deposit arrived right before a decline. Neither is “wrong.” They answer different questions.

4. Inflation-adjusted (real) return

Formula: (1 + nominal return) ÷ (1 + inflation) − 1. A rough shortcut is nominal minus inflation.

Example: a 7% nominal return with 3% inflation is 1.07 ÷ 1.03 − 1 ≈ 3.88% in real purchasing power.

5. The effect of fees

Fees are subtracted from returns every year, so their cost compounds.

Example: $10,000 growing at a hypothetical 7% per year for 30 years becomes about $76,123. With a 1% annual fee (6% net), it becomes about $57,435, a difference of roughly $18,688, or about 25% of the no-fee ending value.

See the FINRA Fund Analyzer and the Investor.gov Compound Interest Calculator for official tools, or try GRIP’s Future Value calculator with regular contributions.

Try it: returns calculator (illustrative)

Looking forward instead? Try the Future Value calculator to see how a starting amount and regular monthly or yearly contributions could grow, in today’s dollars and across a range of returns.

Common mistakes

• Comparing a total return over 10 years with an annual return
• Ignoring fees, taxes and inflation
• Judging a decision by one good or bad year
• Not distinguishing between the fund’s return and your own (timing of deposits)
• Assuming past returns will repeat

Official sources

• Investor.gov Compound Interest Calculator
• FINRA Fund Analyzer
• Investor.gov: Mutual Fund and ETF Fees and Expenses
• Investor.gov Glossary

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