Rate of return, or ROR, is one of those key metrics that personal finance pros and DIY investors alike make use of to understand whether an asset’s performance aligns with a portfolio’s goals.
And it’s a great tool for that, which is why we’ll introduce you to the metric, other metrics that are closely related to ROR that might be of interest to you, and the equation used to find it.
However, there’s a downside when it comes to ROR that you might have already spotted. As the diversity of your portfolio goes up — a good thing — so does the amount of time and effort it takes to understand the ROR of each of the assets within it — a not-so-good thing.
That’s why we’ll also be sure to introduce you to a single, easy-to-use tool that makes calculating your ROR, no matter how large or diverse your portfolio, simple and achievable.
What is Rate of Return?
Rate of return is used to portray the net gain, or loss, of an investment. It does this by comparing the current value of the asset to its original cost as well as any investments and/or expenditures that have happened along the way.
Typically, the ROR is multiplied by 100 to express it as a percentage of the original investment cost:
ROR% = [(Current value − Initial value + Dividends or investments - Fees or expenditures) / Initial value] × 100
Rate of return is a useful equation for almost any investment vehicle, whether that’s a traditional asset like a bond, a non-traditional asset like an NFT (though this can get complex — more on handling these later!), and even a possession like a piece of antique furniture. If the value can change, you can measure the ROR.
What makes ROR different from return on investment (ROI) is that it takes into account any money that has been added or removed from an asset, so it can be more accurate for certain investment types.
You may see rate of return referred to as “basic growth rate” or even “return on investment” — though we know it’s a little different when you dig into the details.
There are a few more nuanced versions of ROR, and metrics related to ROR, that may be a better fit for certain scenarios.
Rate of Return vs. Real Rate of Return
The simple rate of return equation above is nominal, meaning it does not account for inflation. Over time, inflation will reduce the purchasing power of money. Here’s the calculation for real rate of return (or “inflation-adjusted rate of return”):
Real ROR = [(1 + Nominal rate) / (1 + Inflation rate)] - 1
Rate of Return vs. Compound Annual Growth Rate
Closely related to ROR is compound annual growth rate (CAGR). CAGR calculates annual return, so it adds holding time to the standard rate of return calculation. To find CAGR, all you need is an investment’s original value, current value, and the time period for which it’s been held:
CAGR = [Current value / Initial value ^ 1/n] - 1
“N” is the time period, in years, for which the investment has been held.
Rate of Return vs. Internal Rate of Return
Internal rate of return (IRR) is an equation that combines the power of the above equations by accounting for both cash flow and holding time. Because of this, IRR completely levels the playing field and provides a way to compare performance across all asset types. With this information, you’ll be able to accurately rank and make informed decisions about the assets you want powering your portfolio.
Calculating IRR requires a complex equation, so today most investors and financial pros use programs that automate the process. In fact, we’ll show you one such program later in this article.
Why You Should Care About Measuring Your Portfolio Return
Finding the rate of return for your portfolio is really all about getting insight into asset performance — and that is fundamental to investors for a number of reasons.
Maximize Visibility to Nail Expected Returns
Seasoned investors will often have what’s called a “required rate of return” — which is the minimum expected return they’re willing to accept for either investing in or holding onto an asset.
When you’re able to calculate and compare ROR across various assets, you can see if any have fallen below your expected or required rate of return. By identifying these assets, you can remove them from your investment portfolio and free up capital to bring in some that are a better fit.
Better Align Portfolio Return with Your Financial Goals
For investors who are still planning and saving up for retirement, the ideal rate of return on an asset ranges from 6% to 7%.
The only way to know if the assets in your portfolio are meeting this goal is to calculate portfolio performance on a regular basis, using a tool like rate of return. And if they aren’t meeting your standards, you may have to sell a few assets, bring a few more on board, and then re-do that ROR calculation — over and over again until your assets are delivering their expected returns and you’re able to meet your financial goals.
Again, this is another case where it sure would be nice to have a tool in your back pocket for calculating the return on your investments fast, quick, and in a hurry. We have just the tool for you — stay tuned for our recommendation.
2 Approaches to Calculating Your Expected Return
There are two leading ways to find the ROR on your portfolio of assets.
Manually Calculate RoR for Each Asset
The first approach to finding ROR is to calculate it by hand.
This solution is acceptable if you’re doing some so-called “back of the napkin” math to quickly find the return on a last-minute investment. Or, if you’re just calculating the ROR of a few assets in your portfolio whose value you’re curious about for whatever reason. But be warned, finding ROR manually becomes very tedious very quickly for an entire portfolio.
To show you what the process looks like, let’s find the ROR on a pretty standard stock holding.
Stock initial value: $1,000
Stock current value: $1,500
Stock dividends: $200
Stock brokerage fees: $100
ROR% = [(1,500 − 1,000 + 200 - 100) / 1,000] × 100
ROR% = 60%
Not too bad. But imagine tracking down every single cost, every single dividend, and doing the math for every single asset on a regular basis to check the health and progress of your portfolio.
Got NFTs, DeFi assets, or any other investments you purchased in a volatile currency like crypto and want to understand the value of in USD or another Fiat currency?
Then things just got a lot more complicated.
But, they don’t have to be when you use Kubera.
Quickly and Painlessly Calculate Your Entire Portfolio Return with Kubera
As you can see, tracking the rate of return for a diverse portfolio is deceptively challenging!
That’s why we added a feature to Kubera that automatically calculates the return on individual assets. And, we even benchmark your results against industry standards to give you a starting point when determining if you’re happy with the performance you’re seeing.
Kubera is an all-in-one wealth tracker, crypto tracker, and everything else tracker for monitoring and growing a modern portfolio that contains everything from baseball cards to cash, NFTs, stocks, mutual funds, DeFi assets, antiques, precious metals, and whatever else a person can own.
Kubera can import investment information from tons of different accounts, or you can use the clean interface to enter details like asset cost, value, investments, and expenditures. Then, like magic, Kubera crunches the numbers, adds in holding time, and automatically calculates the IRR of your investments for you!
Using Kubera to automatically measure returns is especially valuable for investors who have purchased assets like NFTs with crypto, because it will display your return in whatever currency you prefer. This makes it much easier to understand how an asset has changed in value, since NFTs and the cryptocurrencies used to purchase them have so much volatility.
On top of all this, Kubera will compare the IRR of your asset against common indices and tickers (the S&P 500, Tesla, etc.) so you can see how you’re holding up against more traditional assets to make informed decisions on next steps.
To see it in action and learn more, read Kubera’s help center article all about IRR.
Don’t waste another stressful minute — or day, more likely — manually finding the rate of return for your diverse portfolio.
Instead, upgrade to the most diverse portfolio management platform that has all the tools to serve today’s most diverse investor types.
You can get started with Kubera when you sign up. Or, share Kubera’s white-label solution with your investment advisor to see how you can incorporate the platform into your financial planning.