Getting to Know Investment Return


Getting to Know Investment Return


In the investing world, Warren Buffet is almost like a superhero. In 2015, he had a net worth of $66.7 billion – almost 4 times Verizon’s net income for that same year! He is also considered one of the most successful investors in the world. One of the earliest pieces of advice he gave to the public was: “Never depend on a single income. Make investment to create a second source.”

Well, obviously, people invest because they want to produce income or otherwise known as returns. But then, returns are not created equal. There are various types. Some of them are mutually exclusive from one another, and some are not. Now, let’s get to know what these are.

Total Returns

This is the aggregate amount of what you have earned and/or lost through your investment. In order to compute your total return, you need to determine your original investment amount and then factor in the income (or loss) realized from your investment. This could be interest income, dividends and appreciation/depreciation in your investment value.

One of the most common types of return is interest income, which can be earned through bank accounts, bond investments and money market instruments. The percentage by which you earn interest income in proportion to your investment is referred to as yield.

One also earns from investment through the increase in overall investment value. To compute the appreciation or depreciation in the value of your investment, just follow the formula below:

appreciation and depreciation in value

When investing in stocks, you also get to earn “dividends” Getting to Know Dividends, or distribution of a company’s earnings, whether in full or in part, to its owners or shareholders.

In consideration of dividends, we now show you how to calculate ROI using the return on investment formula below:

ROI formula

After-Tax Returns

They say there are two things you cannot escape from in life: death and taxes. While you may rejoice that you have earned from your investment, let us not forget that you still need to pay Uncle Sam a.k.a. the IRS, and therefore file your IRS tax return. When computing your total returns, you should also take into consideration the applicable taxes, both at the state and federal levels.

Psychological Returns

Yes, you’ve read that right. Returns do not only benefit the pocket but also benefit the mind. These returns include having fun while investing, being rewarded by the challenges brought about by investing and the satisfaction achieved knowing you’ve made the right investment choices.

Savings and Money Market Account Returns

A lot of people are afraid to invest in long-term investments such as stocks, bonds and real estate because they are worried that they might not have immediate cash in cases of financial emergencies. While having an emergency fund is a pre-requisite in investing, you may still earn through setting aside that money.

One of the most common options is your savings account, which you can earn through interest income paid by the banks. It’s important to note, though, that this interest is far from substantial and should not be resorted to in lieu of long-term investments. Another place where you can keep your emergency money, which, mind you, earns more than your savings account with the same level of security, is in a money market fund.

Bond Returns

Bonds are debt investments in which the investor is the lender. And like all debt, it is subject to interest, which is one-way bond investors could earn through purchasing bonds. Bondholders can also trade their bonds for a profit in organized exchanges or over-the-counter markets.

Stock Returns

Returns for stock investments, also known as stock returns, may either be in the form of dividends, investment appreciation or profits realized through trading. Stock investments have historically been the best performers in the longer term. However, the environment to which they are exposed is more volatile than bonds and generally other investments.

Real-Estate Returns

Real-estate returns comprise the income derived from the sale and rent of real properties such as land and residential, agricultural and commercial properties. One crucial thing you must consider to maximize real estate returns is evaluating the supply and demand in the area where the property is situated.

Find out more about growing your net worth through residential real estate investing by clicking here.

Small Business Returns

Running your very own business does have its fair share of nonfinancial rewards. Imagine having to do what you’re passionate about every day? Sounds fun! Financial returns are also a welcome plus! The income you realize from your business net of expenses incurred is considered your net return.

The Bottom Line

The ultimate goal of investing is to earn. Earnings are measured through returns. It is essential that as an investor (or a potential one), you are wary of what these returns are so you know what to expect, what to aim for and what to achieve.