Course 506: Calculating Your Personal Rate of Return
How to Do It
In this course
1 Introduction
2 Reported Returns versus Personal Rates of Return
3 Calculating Your Personal Return
4 How to Do It
5 What Personal Returns Tell You

Here's what you need to calculate personal returns for a single year:

• Your ending balance from the preceding year (for a single fund or for a portfolio of funds). For the sake of our example, let's say the preceding year's balance is $2,500.

• Your ending balance from the year for which you're calculating the returns. In our example, we'll use a final balance of $5,250.

• How much you invested during the year and the months in which you made the investments. In our example, the investments were $1,000 in May and $1,500 in November.

Note that the beginning balance and the investments during the year are negative numbers when you're using a financial calculator or spreadsheet. That's because you're trying to figure out the internal return represented by the difference between the $5,250 you ended up with and the $5,000 you invested ($2,500 beginning balance plus two investments during the year of $1,000 and $1,500).

If you're using a financial calculator, here's what to do:

1. Make a chart of your monthly cash flows. For a portfolio, pool together the cash flows for all of your funds. Assume that all investments during a month are made at the beginning of that month. Sum your initial balance and any January investment for the first month's entry. Also, determine the value of your fund at the end of the holding period. Locate the cash-flow function on your financial calculator and clear the memory of any old data.

2. As your calculator prompts you, enter cash flows. (Inflows are negative and outflows are positive.) Enter 0 for months with no cash flows and enter your ending balance as the final, positive cash flow.

3. Choose the IRR (internal rate of return—another term for personal rate of return) function on your calculator and compute. The result is your monthly personal rate of return.

4. (1) Divide your monthly IRR by 100. (2) Add 1. (3) Raise the number to the 12th power (12 months in a year). (4) Subtract 1. (5) Multiply by 100 to get the annual percentage.

 Calculating IRR with a Financial Calculator
Month

Flow

Calculator
Key
Command
January
0
ENTER
cash flow
-2,500
February
0
ENTER
cash flow
0
March
0
ENTER
cash flow
0
April
0
ENTER
cash flow
0
May
1,000
ENTER
cash flow
-1,000
June
0
ENTER
cash flow
0
July
0
ENTER
cash flow
0
August
0
ENTER
cash flow
0
September
0
ENTER
cash flow
0
October
0
ENTER
cash flow
0
November
1,500
ENTER
cash flow
-1,500
December
0
ENTER
cash flow
0
ENTER
ending balance
5,250
      Monthly IRR
0.5928
      Annual IRR
7.35%

With a spreadsheet program such as Excel, enter the months and cash flows as follows:

January
-2500
 
February
0
March
0
April
0
May
-1,000
June
0
July
0
August
0
September
0
October
0
November
-1,500
December
0
Ending Balance
5,250

Select the IRR function, and you’ll get the monthly personal rate of return for your portfolio. Follow step four above to calculate the Annual IRR.

Next: What Personal Returns Tell You >>


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