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What Is My Return On Investment

What Is the Return on My Investment

Looks So Simple

Looks can be deceiving and the wrong math applied to any calculation is dangerous. Further, calculating returns is typically more complex than dividing two numbers.

Before we break out the math, what sort of return are we talking about? Capital appreciation (stock price changes) or total returns (includes money we received from dividends)? Are we looking year-to-date, the last twelve months, etc.?

To answer these questions, let’s examine an actual family member account we opened this year with $25K in January. Each month the family added new money until it totaled $150K invested before returns.

Now, we could very simply look at the total change in stock prices and divide that by account value today in December 2024. If we did this, we would see this account is worth about $162K today with $12K of stock price gain which would be about 7.5%, and that is completely wrong and misleading.

 

The Complexity We Cannot Avoid

If we simply divided the $12K by $162K, we are assuming we had that full $150K to invest in January, which was not the case. Instead, what we have to do is measure each addition to the account separately and then take a weighted average to calculate the returns for the time the money has been invested, which is far higher than 7.5% in this case. It’s actually close to 14% when we properly take into account that money was added each month.

But wait! That’s just the capital price appreciation this account had. There were also $6K in dividends paid which we have to measure in the same way we did for stock price changes – looking at each addition to the account separately and then taking a weighted average for the correct total returns. When we do this, we see about a 20% total return for the year, and far different from our simple and flawed 7.5% calculation.

It can get complicated quickly and there’s still more to consider.

 

Returns Over Which Time Period?

We can also look at our accounts over many time periods: the current month, the last 3 months, year-to-date, the last twelve months or any other period you may wish to see.

Is there a measure we should prefer over all others? In a perfect world where there were no annual taxes, we would argue measuring returns over a complete economic cycle is best. Of course, that’s a multiyear process and folks would have to agree on when the cycle begins and ends. That’s never going to happen and we live in a world of annual taxes, so we need a more realistic measure.

Year-to-date is the single best measure in our opinion. It’s important because our taxes are measured this way and we cannot selectively pick time periods that make us look better. Many firms will play games with time periods to make them look better and we will not for transparency and accountability reasons.

 

The Charles Schwab Problem

We love Charles Schwab for 99% of what they do and how they do it. They are terrific in many respects except for one. If you look at your account or monthly statement, Schwab doesn’t make any return calculation. You can see things that look like a return, but upon closer examination, they do not call these returns because they are not.

Here’s where the confusion enters – most brokers do the return calculations for us by taking into account when we’ve added money and any distributions like dividends that we receive which Schwab has avoided. With nothing labeled a return, it is natural to search for something that looks like that number and we can end up with something very misleading like in the real-life example above.

Our simple solution since we love everything else about Schwab is to use a different reporting platform that makes the correct calculations and provides deeper analysis on every client portfolio. Black Daimond solves the issue and are the only reports we should look at for accurate returns.

 

Conclusions

Total return (stock price changes plus dividends received) on a year-to-date basis for taxes is the single fairest way to measure investor returns in our experience. Charles Schwab does not offer these calculations, so please rely on our Black Diamond reports instead.