Investment Return

When you invest, you're interested in whether you're making progress toward your financial goals. Return on investment can help you gauge how much progress you're making. Your total return is the profit or loss on the money you invest. It's calculated by adding any income an investment pays to the change in the investment's value, or price.

You can evaluate the performance of your investment against that of other investments by using percentage return. Looking at a percentage rather than a dollar amount allows you to compare results even when the amounts you invest are very different. You find percentage return by dividing total return by the investment's initial cost.

Annualized return, or annual percentage yield, takes into account the amount of time you've held an investment. Another way to make a meaningful comparison among investments, annualized return is calculated by dividing percentage return by the number of years in question.

For example, if you buy a stock that does not pay dividends at $20 a share and sell it for $27 a share, your return is $7. If you held the stock for one year, that would be a 35% annual percentage return ($7 / $20 = 0.35, or 35%). But, if you held the stock for four years before selling it at $27 a share, your annualized return would be 8.75% (35% / 4 = 8.75%).

Remember though, that inflation, transaction fees and taxes are likely to erode the total return on investments. Real return represents the purchasing power of what you receive from your investments, after accounting for inflation.

Yield measures the income from an investment, expressed as a percent. It is calculated by dividing the annual amount you receive (in dividends or interest) by the initial investment amount.

For example, if you paid $900 for a bond with a par value of $1,000 that pays 7% interest, or $70 a year, your yield is 7.8% ($70 / $900 = 0.0777). If you paid $1,100 for the same bond, your yield would only be 6.4% ($70 / $1,100 = 0.0636).