The basic formula: what you gained minus what you paid

Investment return is the money you made (or lost) on an investment, expressed as a percentage of what you put in. The simplest version is: subtract what you paid from what you have now, then divide by what you paid, then multiply by 100 to get a percentage.

If you bought a stock for $100 and sold it for $120, you gained $20. Divide $20 by $100 and you get 0.20, or 20% return. If you bought for $100 and it's now worth $80, you lost $20, which is a −20% return. This basic math works the same whether you're measuring a single stock, a mutual fund, or your entire portfolio.

The catch is that real investing rarely stays this simple. You may hold an investment for years, receive dividends or interest along the way, add more money partway through, or sell in pieces. Each of these changes which calculation you should use.

Key Takeaways

  • Simple return (ending value minus starting value, divided by starting value) works only when you buy once, hold, and sell once with no income in between.
  • Total return includes dividends, interest, and capital gains all together, and is the number most investors should track.
  • Time-weighted return removes the effect of when you added or withdrew money, so you can see how the investment itself performed.
  • Money-weighted return (also called internal rate of return) shows your actual profit accounting for the timing and size of your deposits, which is what matters for your own finances.
  • Most brokerage statements show total return, but you may need to calculate money-weighted return yourself to understand your real performance.

Total return: the number that includes everything you earned

Total return is the sum of all gains from an investment in one number. It includes capital gains (the price going up), dividends (cash payments from stocks), interest (cash from bonds), and any other income the investment generated. This is usually what you want to know: did this investment make money, and how much?

To calculate total return, add up everything you received (current value plus any cash you took out) and subtract what you paid in. Divide by what you paid in, multiply by 100.

Example: You bought a stock for $1,000. Over three years it paid you $150 in dividends. It's now worth $1,200. Your total return is ($1,200 + $150 − $1,000) ÷ $1,000 = 0.35, or 35% over three years. If you want to know the annual return, you would need to account for the time period (see below).

Annualized return: comparing investments across different time periods

An investment that returns 35% over three years is not the same as one that returns 35% in one year. Annualized return converts any return into a yearly rate so you can compare different investments fairly, even if you held them for different lengths of time.

The formula is: (ending value ÷ starting value) raised to the power of (1 ÷ number of years), minus 1, then multiply by 100. This sounds complicated, but most calculators and spreadsheets can do it. In Excel or Google Sheets, use the POWER function: =POWER(ending value/starting value, 1/years)−1.

Using the example above: $1,200 ÷ $1,000 = 1.2. Raise 1.2 to the power of (1÷3) = 1.2^0.333 = 1.0627. Subtract 1 and multiply by 100: 6.27% per year. That's very different from 35% per year, which is why the time period matters.

Money-weighted return: what you actually earned given when you invested

Money-weighted return (also called internal rate of return or IRR) accounts for the timing and size of your deposits and withdrawals. It answers the question: given that I put in $5,000 in January, another $2,000 in June, and withdrew $1,000 in September, what was my actual return?

This matters because $5,000 invested in January had more time to grow than $2,000 invested in June. Money-weighted return gives more weight to money that was invested longer. It's the number that best reflects your personal financial outcome, because it shows what you actually earned on the money you actually had invested.

Calculating money-weighted return by hand is tedious — it requires solving for a rate that makes all your cash flows balance out. Most brokerage platforms calculate it for you (often labeled as "internal rate of return" or "IRR"). If you need to calculate it yourself, use a spreadsheet's IRR function with a list of all your deposits (negative numbers) and withdrawals (positive numbers) plus your ending value.

Time-weighted return: measuring how the investment performed, separate from your deposits

Time-weighted return removes the effect of when you added or withdrew money. It shows how the investment itself performed, independent of your personal cash flow decisions. This is useful if you want to compare a fund's performance to a benchmark, or if you're evaluating a financial advisor's performance.

Time-weighted return breaks your holding period into smaller periods at each deposit or withdrawal, calculates the return for each period separately, then chains them together. The math is complex enough that you should use a spreadsheet or financial calculator rather than doing it by hand. Most mutual funds and ETFs publish time-weighted returns because it's the fairest way to show how the fund itself performed.

For most personal investors, money-weighted return is more useful than time-weighted return, because you care about your actual outcome. But if you're comparing two funds or two advisors, time-weighted return is the right metric because it removes the noise of when you happened to deposit money.

How to handle fees and taxes in your return calculation

Investment fees (management fees, trading commissions, advisory fees) reduce your actual return. If you want to know what you really made after paying for the investment to be managed, subtract fees from your ending value before you calculate return. Most brokerage statements do this automatically.

Taxes are trickier. If you're calculating return in a taxable account (not a retirement account), you have two choices: calculate pre-tax return (what the investment earned before taxes) or after-tax return (what you keep after paying taxes). Pre-tax return is easier and is what most statements show. After-tax return requires knowing your tax rate and when you paid taxes, which varies by account type and your personal situation.

For retirement accounts like a 401(k) or IRA, taxes are deferred or not owed at all, so you typically calculate return on the pre-tax value. The taxes come later when you withdraw.

Common mistakes in calculating return

The most common error is using simple return when you should use annualized return. A 50% return sounds great until you realize it happened over 10 years, which is only about 4.1% per year. Always check the time period.

Another mistake is forgetting to include dividends or interest. If a stock paid you $50 in dividends and went up $100 in price, your total return includes both. Leaving out the dividends makes your return look smaller than it actually was.

A third error is mixing up money-weighted and time-weighted return. If you're trying to understand your own financial outcome, use money-weighted. If you're comparing how two funds performed, use time-weighted.

Finally, be careful about the starting and ending dates. A return calculated from January 1 to December 31 is different from one calculated from June 1 to May 31, even if it's the same calendar year. Always be clear about which dates you're using.

Frequently Asked Questions

What's the difference between return and yield?

Return is the total gain or loss on an investment over a specific period. Yield is the annual income (dividends or interest) an investment generates, expressed as a percentage of its current price. A bond might have a 4% yield but a 10% total return if its price also went up. Yield is useful for income-focused investors; return is useful for measuring overall performance.

Should I use simple return or annualized return?

Use simple return only if you held the investment for exactly one year. For any other time period, use annualized return so you can compare it fairly to other investments or to a benchmark. Annualized return removes the distortion of time and makes all returns comparable.

How do I calculate return on a mutual fund or ETF?

Most mutual funds and ETFs publish their own returns on their fact sheets and websites. These are usually time-weighted returns, which show how the fund performed independent of when you bought in. Your personal return (money-weighted) may differ because it depends on when you invested. Your brokerage statement will show your personal return.

Can return be negative?

Yes. If an investment loses value, your return is negative. A stock that drops from $100 to $60 has a −40% return. Negative returns are common in down markets and are a normal part of investing. Over long periods, diversified portfolios tend to recover, but individual investments can lose money permanently.

Why does my brokerage statement show a different return than I calculated?

Your statement may be using a different calculation method (time-weighted vs. money-weighted), including or excluding fees and taxes differently, or measuring a different time period than you are. Check the statement's footnotes to see which method it used. If you're calculating by hand, make sure you're using the same start and end dates and including all deposits, withdrawals, dividends, and fees.