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Investing is a bit like getting a fresh haircut. When you first get one, you feel like you’re on top of the world. You’ve done your homework and picked the perfect style for you. Over time, however, your hair starts to grow and get a little wild. If you leave it too long without regular maintenance or follow-up cuts — it can get downright messy.

While investing is definitely a little more complicated than a simple haircut, it’s still true that regular maintenance is an absolute necessity. Finding great investment opportunities through careful financial planning is only one part of the equation. You need to measure the strength of your portfolio often in order to know if it’s doing well.

Of course, monitoring the performance of your investments depends on what information you’re trying to get and the actual investment types you have. With that in mind, there are some overarching concepts that you must first understand when it comes to your measurements. While each measurement strategy needs to be customized based on your needs, these will help give you a better idea of what you should be keeping an eye on.

Calculating Your Rate of Return

Your rate of return refers to the net gain or loss on an investment over a specific period of time, and this is shown as a percentage of the investment’s initial cost. Simply put, it’s how much money you’ve made or lost on your investment.

There’s even a mathematical method to the madness. In order to get your percent return, the formula looks like this: (change in value + income) ÷ investment amount = percent return. Don’t worry, this looks a lot more difficult to decipher than it really is.

Let’s say you invest $5,000 to buy 100 stocks of a share at $50 per share. If the price of that share moves up to $60 while you own it and the company pays you $100 in dividends, all you have to do is add your $1,000 increase with the dividends and divide by the $5,000 investment amount for the percentage. In this case, your percent return would be 22%.

Another important thing for new investors to keep in mind is that you don’t have to sell your stocks to calculate the return. As a performance indicator, this is a valuable way of assessing whether you want to keep a particular stock or trade it. It’ll give you the ability to make stronger and better-informed decisions about the strength of your portfolio.

Understanding Yield

You may have heard this term skimming over a financial news segment at some point. Yield is a more forward-looking measurement than your rate of return. They’re usually expressed as an annual percentage rate based on investment cost, current market value, or face value.

Instead of focusing on capital gains, yields specifically measure income such as interest and dividends. That income comes from the specific context of a selected period of time that’s annualized. It also takes into account that interest or dividends will continue at the same rate measured in that period.

Yields are also a little more limited than a rate of return in that every investment doesn’t include interest or dividends. Mutual funds, stocks, and bonds are the three most common security types that can be measured for both rates of return and yield. The easiest way to differentiate between the two terms is to know that the rate of return is all about the total return, whereas yield is how much has been returned based on initial cost. 

Want to know if your investments are paying off? We’ll get you the financial planning you need with a trusted team of financial advisors that will manage your wealth with care and confidence. Contact us today!