Calculate your investment return

Q: Should I include dividends in the investment return calculation?

For a complete picture of total return, yes. Dividends historically represent about 40% of the S&P 500's total return. If you reinvest dividends, include them in the final value. Excluding dividends understates the true return of income-producing investments.

Knowing that your investment has grown is satisfying, but knowing exactly how much it has grown — and at what annualised rate — is what separates informed investors from passive ones. Two investments can both double your money, yet one can do it in three years while another takes fifteen. Without calculating the annualised return, you have no basis for comparing performance across different assets, time periods, or strategies. Return on investment (ROI) and its time-adjusted companion, the compound annual growth rate (CAGR), are the two foundational metrics every investor should understand and use routinely.

CAGR is particularly powerful because it smooths out the volatility of year-to-year fluctuations and presents a single representative annual rate that, if applied consistently, would have produced the same final outcome. It allows you to compare a real estate investment held for seven years against a stock portfolio held for four, or evaluate whether your portfolio has beaten inflation, the risk-free rate, or a benchmark index. ROI, while simpler, is useful for quick comparisons when the time dimension is the same across all options being evaluated. Together these two metrics give you a clear, unambiguous picture of financial performance.

How are ROI and CAGR calculated?

Both metrics require the same core inputs, and once you have them, the calculations are straightforward. The key is ensuring your initial and final values are comparable — both should include or exclude fees, taxes, and reinvested dividends consistently, depending on what you want to measure.

Initial value (PV): The amount you originally invested, including any purchase costs or fees. For a stock portfolio, this is the total cost basis including brokerage commissions. For real estate, it is the purchase price plus transaction costs. Be precise — underestimating the initial cost inflates your apparent return.
Final value (FV): The current or sale value of the investment, net of any sale costs. For investments that produced income (dividends, rent), decide whether to include those in the final value or treat them separately. Total return calculations typically include reinvested dividends; price-only returns do not.
Duration (n): The number of years the investment was held, which can be expressed as a decimal for partial years. A holding period of 5 years and 6 months is n = 5.5. The duration is the denominator in the CAGR exponent, so precision matters — a 5-year vs. 5.5-year calculation produces noticeably different CAGR figures at high return levels.

The two formulas are: ROI (%) = (FV – PV) / PV × 100 — this gives the total percentage gain over the entire holding period regardless of duration. CAGR = (FV / PV)^(1/n) – 1 — this gives the annualised growth rate that would produce the same final outcome. CAGR is always the better metric for comparing investments of different durations.

Worked example: an equity investment over 5.5 years

Marcus invested $8,000 in a diversified stock portfolio in January 2019. By July 2024 — 5.5 years later — the portfolio was valued at $14,500, with all dividends reinvested. He wants to evaluate whether this has been a good investment.

ROI calculation: ROI = ($14,500 – $8,000) / $8,000 × 100 = $6,500 / $8,000 × 100 = 81.25%. Marcus's portfolio has grown by more than 80% in total since his initial investment.

CAGR calculation: CAGR = ($14,500 / $8,000)^(1/5.5) – 1 = (1.8125)^(0.18182) – 1 ≈ 1.1133 – 1 = 11.3% per year. This means his portfolio has grown at an annualised rate of approximately 11.3%, which comfortably exceeds typical inflation (2–3%) and the long-run average of a global index fund (7–10%).

For context: if Marcus had simply left the $8,000 in a savings account earning 1.5% per year, it would have grown to $8,000 × (1.015)^5.5 ≈ $8,690 — a gain of only $690. The equity portfolio outperformed the savings account by over $5,800 over the same period. This comparison underscores why calculating CAGR on different options is essential for making rational investment decisions.

Frequently asked questions about investment returns

What is a good annualised return on an investment?

It depends on the asset class and the time period. Historically, broadly diversified global equity portfolios have delivered 7–10% nominal CAGR over long horizons. Bonds have returned 2–5%. Real estate varies enormously by location. The more relevant benchmark is not an absolute number but whether your return exceeds inflation (to preserve purchasing power), the risk-free rate (e.g., government bond yield), and the average return of a comparable index. If your active investment strategy underperforms a passive index fund, it may not justify the additional risk and effort.

What is the difference between ROI and CAGR?

ROI measures total percentage gain over the entire holding period, without accounting for how long that period lasted. CAGR expresses the same outcome as an equivalent annual rate. ROI is useful when comparing investments held for the same duration; CAGR is essential when durations differ. For example, a 50% ROI over 2 years (CAGR ≈ 22.5%) is far better than a 50% ROI over 10 years (CAGR ≈ 4.1%), even though both report the same ROI figure.

Should I include dividends in the investment return calculation?

For a complete picture of total return, yes. Dividends often represent a significant portion of equity returns — historically about 40% of the S&P 500's total return has come from dividends. If you reinvest dividends, include them in the final value. If you withdrew them as income, add their cumulative value to the final value for total return purposes. Excluding dividends understates the true return of income-producing investments.

How do fees and taxes affect my real investment return?

Significantly. A 1% annual management fee reduces a 30-year CAGR from 8% to 7%, which cuts the final balance by roughly 25%. Capital gains taxes further reduce your net return upon realisation. The practical implication is to minimise fees by using low-cost index funds (expense ratios of 0.03–0.20% are readily available) and to use tax-advantaged accounts to defer or eliminate taxes on gains, preserving more of each year's return to compound in subsequent years.

Can CAGR be negative?

Yes. If your final value is less than your initial investment — for example, if you invested $10,000 and it is now worth $7,000 after 4 years — CAGR = ($7,000/$10,000)^(1/4) – 1 = 0.7^0.25 – 1 ≈ –8.3% per year. A negative CAGR means your investment has eroded in value on an annualised basis. This is important information: it tells you not just that you lost money, but at what rate, which allows comparison against alternative uses of that capital.

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