How To Calculate Portfolio Return: An Investor’s Guide

Key Takeaways


Almost every investment portfolio aims to maximize overall returns — it’s what investors choose to do with those returns that will vary from person to person. With that being said, the best way to ensure you are building a successful portfolio is through consistent evaluation. The key to this practice can be found by learning how to calculate portfolio return.

The formula for portfolio return can help investors estimate their annual gains and compare the performance of different assets. This is an invaluable skill, no matter where you are in your investing career. Keep reading to learn more about how to calculate portfolio return and start practicing today.

What Is Portfolio Return?

Portfolio return is the gain or loss from an investment portfolio, typically made up of multiple asset types. Investors will choose assets based on their financial goals and risk tolerance and attempt to maximize their overall returns. The purpose of looking at portfolio return is to ensure a balanced, high-yielding investment portfolio. Sample assets include stocks, bonds, ETFs, real estate, and more.

There are specific benchmarks used when looking at portfolio return, depending on the types of assets that are included. Most investors will calculate their portfolio returns annually to ensure they are meeting their financial goals. When analyzing portfolio returns, a common strategy is to choose investment types that move in opposite directions, such as stocks and bonds. This is one way to use portfolio return to balance your investments and reduce overall risk. There are numerous other ways to use this calculation to your benefit.


[ Do you control your finances or are your finances controlling you? Register to attend our FREE online real estate class and find out how real estate investing can put you on the path toward financial independence. ]


portfolio return calculator

Portfolio Return Formula

The portfolio return formula might take you back to math class, but don’t let that intimidate you. With a little practice, portfolio return is a lot easier to work with than you might think. Here is the portfolio return formula:

Rp = ∑ni = 1 w i r i
Before we walk through the steps necessary to solve this formula, it is important to understand a few of the above variables. By learning what these figures mean, you will be well on your way to calculating portfolio returns:

  • W: The weight of each asset, or the amount of your portfolio that asset makes up.
  • R: This stands for the return of an individual asset, which can be calculated depending on the asset type.

How To Calculate Portfolio Return

The formula for portfolio returns can be solved with simple addition — but only after you determine a few things about each asset type. Essentially, investors will need to calculate the weight and return of each asset in their portfolios. I would recommend starting this process in a spreadsheet to keep the asset types organized and simplify the required math. When you are ready to start, the following steps can be used to calculate portfolio return:

  1. Start by determining the returns of each asset type. You can use investment returns from a weekly, monthly, or annual basis — remember to be consistent across assets.
  2. Next determine the weight of each investment type. To do this, take the amount you invested in that asset and divide it by the total amount invested in the portfolio. Repeat this formula for each asset type to get each investment weight.
  3. For each asset type, multiply the number of returns by the portfolio weight. This step is illustrated by looking at “ wi ri” in the formula.
  4. Once you have this number for each asset type, add the percentages together to get the overall portfolio return.

Example Of How To Calculate Portfolio Return

The best way to learn how to calculate portfolio return is by looking at an example. Johnny’s portfolio has three asset types: real estate, stocks, and bonds. The total investment amount for his portfolio is $750,000. In Johnny’s portfolio, the annual returns are: real estate 10%, stocks 8%, and bonds 2%.

Our next step is to compare each asset type’s initial investment to the overall investment amount of the portfolio. For real estate, Johnny invested $425,000. If we divide 425,000 by 750,000 we get .56. Next are stocks, which have an initial investment amount of $275,000. The weight of this asset type can be solved by (275,000 / 750,000). This gives us .36. Finally, Johnny invested $50,000 in bonds, which has a weight of about .06 in his portfolio.

Now that we have the return and weight of each investment, we need to multiply these numbers. For real estate, we will multiply .56 by 10% to get 5.6%. Following this formula for stocks and bonds, we get 2.88% and .12%, respectively. If you add each of these percentages together, the overall portfolio return is 8.6%.

For this example, we knew the exact return amounts for each investment type — but in reality, you may not always have these numbers before you start. Keep reading to learn more about how to calculate returns for all of your investments.

portfolio return

How To Calculate Portfolio Return For All Your Investments

The only way to accurately calculate your portfolio return is to understand the performance of each individual asset. Unfortunately, returns can be impacted by economic changes, political events, market fluctuations, and more. Each of these components makes it challenging to determine your annual returns by asset, but with the right amount of data and patience you can figure it out. Before getting started, there a few factors that can influence your overall portfolio return to be aware of:

  • Net asset value
  • Holding period return
  • Cash flow adjustments
  • Annualized returns

Net Asset Value

Net asset value (NAV) is the value of an asset minus the total cost of its liabilities. NAV is most commonly used when analyzing mutual funds or ETFs. The NAV formula will break down the per-share value of an asset at a specific point in time. Some investors will compare NAV across time periods to help analyze a specific asset, but this formula can also help as you attempt to calculate portfolio return. Identify a time period you want to calculate for and use NAV to estimate the value of your investments.

Holding Period Return

Holding period return (HPR) is one of the simplest methods for calculating investment returns. It builds on NAV and takes income from interest or dividends into account. The HPR formula is as follows:

HPR = Income + (End of period value – initial value) / Initial value
When calculated correctly, HPR can reveal the total return from holding a given asset. This is highly beneficial when looking at overall portfolio returns, as the formula accounts for assets being held for different periods of time.

Cash Flow Adjustment

It is important to adjust for the amount of cash flow generated by each investment type when determining returns. Adjusting cash flow will result in more accurate calculations, and ultimately a more accurate look at your portfolio returns. For example, if you added funds to an investment in your portfolio mid-period, the cash flow may be skewed for that asset. A common method used to adjust cash flow is through the modified Dietz method, explained here by Investopedia. For our portfolio return calculator, it is important to note any changes in cash flow to your investment types and adjust returns accordingly.

Annualized Returns

While the HPR formula is a great tool for comparing investments made over different periods, annualizing returns can take this process one step further. Annualized returns illustrate the average return of an investment over an entire year. This practice helps investors compare investments more easily by giving the return amounts a common denominator, in this case, one year.

Summary

There are numerous ways to evaluate your performance as an investor, but perhaps none is more revealing than looking at your overall portfolio return. This formula considers the weight and returns of each investment to provide a comprehensive look at the value of your portfolio. Not only can this be used to compare investment types, but it can also be used to reevaluate your overall investment strategy and identify areas for opportunity. That being said, learning how to calculate portfolio return is a crucial skill for investors of all experience levels. Practice with the above example and let us know if we left anything out.

Do you have a good portfolio return calculator? Share in the comments below how you approach this formula.


Are you interested in learning more about today's most lucrative real estate strategies?

Whether you’re brand new to investing, have closed a few deals, or are a seasoned investor— our new online real estate class reveals the best real estate strategies to get started with real estate investing in today's market. Hosted by expert investor Than Merrill, you'll learn how these time-tested strategies can help you to find success in real estate.

Register for our FREE 1-Day Real Estate Webinar and get started learning how to strategically invest in today’s real estate market!

Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies