How do you measure the true Rate-of-Return on your money?

In other words how are your 401(k) investments doing …

  • Are you one of those people who just assume your portfolio is doing well because each time you log on (or open)  and peek at your statement, it is higher than it was the last time?


  • Are you one of those people who never look because each time you do, it is worse than before?


  • Are you one of those people who will honestly say that you have no IDEA?


  • My favorite; people who say “good,” when you ask, even though they have no idea.

Well here is Safer Investment lesson #117: How to calculate the true Rate-of-Return (RoR) on your investments: that is you *at risk rate of return*

Example one:

Simple rate of return

Investment balance at the beginning of the years:

Beginning/starting balance 12-31-2011                                 $30,000

Addition/Contribution                                                              $3,000

Current Value 12-31-2012                                                      $36,600

Actual Investments Gain/Earning                                             $3,600

Your actual rate of return is 12% (not 22%)

Easy math: Your ending value $36,600 minus  $33,000 (original balance plus what you add/contribution) gives you $3,600 dividend by your original balance ($30,000)  = 12%.


However your true RoR is your “at risk Rate-of-Return” *

Before you tune me out, I promise that it is not as complicated as it sounds.

It is this simple when you measure your true RoR, you need to figure out which part of your portfolio is at risk and which items are not.

For example: If you start with $3,000.00 and assuming that you add no more and at the end of the year, it is going to be the same $3,000, no risk — no gain.

However, let use another example to learn how to calculate your true RoR, or as I think it should be properly called, *Your at-risk rate-of-return*

Example 2: (no additions or withdrawals, this way we will keep the math simple)

Balance at the beginning of the year, Allocation:

  • Cash                                                            $31,200
  • Dividend-paying stocks                                   $72,800

Total Portfolio                                    $104,000

Balance at the end of the year, Allocation:

  • Cash                                                             $31,200
  • Dividends paying Stock                                  $88 400

Total Portfolio                                          $119,600

Total Gain/Earning  for the year is         $15,600

$15,600 is how much you gained. Divided by the amount that is at risk $72,800. (Dividend paying stock)

You’re *at-risk rate-of-return* is 21.42%

Most investment companies/firms, banks, brokerage firms and my least favorite mutual funds would say your rate of return is 15%.

$15,600/$104,000, which is a very simply rate of return calculation, however this incorrect.   

Using a benchmark to compare you RoR:

Often you will see mutual fund, etc., use a benchmark such as the S&P 500 to compare your RoR and while this is good at times, it is very incorrect. It is correct if all the same stocks are in the S&P 500 are the same as from the beginning of the year to the end of the year or at the time period for which you are comparing.

A little dirty secret: most people do not know that, from time to time, the DOW, The S&P 500 and most other indicators do a forced bait-and-switch. For example, in the last major stock market crash we had in 2008-2009; the DOW yanked out poorly-performing  stocks that were on the verge of bankruptcy like American International Group (AIG), Citigroup (C) and General Motors (GM) only to replaced them with “Cash Rich Balance Sheet ” companies like Kraft Foods (KFT), Cisco System (CSCO) and The Travelers Companies, Inc.(TRV).

This is like halfway through a marathon, you pull a 50-year-old overweight male off the course and replace him with a well-rested Usain Bolt.

Now at the next party where you hear people bragging how well their Investments are doing, (and, trust me, you will) take a nice long sip of your Pinot Nor and say “that is wonderful my good friend, but tell me what is you true ‘at-risk return’?” As he observes at how smug, chic and financially literate you are, he will indeed stop boasting about his investments and start talking about something more interesting such as gardening.

Sherwin Brown

About Sherwin Brown

Sherwin has been an entrepreneur since he was twelve years old. He currently teaches, writes, and speaks to people about how to improve and safeguard all aspects of their financial portfolios.