Know Your Investment Returns

Let's go back to our IBM and Exxon Mobil example.

Right now, the daily returns (based on recent trading days) for each stock are -1.12% and +3.31%, respectively. Here's how we would calculate our portfolio's returns under each of these methods:

Price-Weighted:

Today's Combined Prices minus Yesterday's Combined Prices divided Yesterday's Combined Prices

($149.17 - $149.97) / $149.97 = -0.53%

Value-Weighted:

(Today's Values - Yesterday's Values) / Yesterday's Values

($459.12B - $455.44B) / $455.14B = +0.81%

Equal-Weighted:

Exxon's Daily Change + IBM's Daily Change

-1.12% + 3.31% = +2.19%

That's right, the way returns are calculated can mean the difference between gains and losses on a given day. As you can see, over time there can be a pretty material difference in returns depending on how they're calculated.

Delving Deeper into Returns

It's true that calculating returns is serious business, after all they're the best way you can get a glimpse of how your investments are doing. Academics have been working on new ways to calculate returns for decades, and you can bet that there's a lot more to returns than we've been able to look at here. If you want to delve deeper, here are some more advanced resources you can use to calculate your returns.

Fat Pitch Financials offers a tutorial on calculating your returns, as well as useful spreadsheets to help you calculate them for your holdings.

Geometric Average Return. The most accurate way to look at your performance is by calculating this useful metric.

TheStreet.com's Portfolio Yield Calculator offers a quick way to calculate the returns on your portfolio.

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