Calculate Compound Return
Compound return is a measure of investment performance that takes into account the effect of compounding. It is calculated by taking the initial investment, adding the returns earned over a specified period, and then reinvesting those returns. This process is repeated for each period, resulting in exponential growth of the investment.
3 Key excerpts on "Calculate Compound Return"
eBook - ePubClever Girl Finance
Learn How Investing Works, Grow Your Money
- Bola Sokunbi(Author)
- 2020(Publication Date)
- Wiley(Publisher)
...However, when you lengthen that time horizon to the last 50 years, from 1968–2018, the stock market had an average return of 10.09%. 5 Adjusted for inflation, this comes out to between 7 and 8%. 6 I'm sure you'll agree with me that over the long term, it makes total sense to focus on beating inflation by as much as possible. I'll take 7 or 8% over 0.09% anytime! Outside the United States To see international inflation rates by country, visit cia.gov and search “Country comparison inflation rate.” Now let's get into the concept of compounding. COMPOUNDING Compounding is my absolute favorite thing when it comes to my finances, because it's essentially what allows my money to turn into more money, and my money's money to turn into even more money, and my money's money's money—okay, I'll stop. But you get where I'm going, right? There’s a reason why compounding is referred to as “magical,” “powerful,” and “game-changing” when it comes to wealth building. And it's also why everyone who really understands the magic of compounding agrees. Compounding is amazing! Let me break it down. HOW COMPOUND INTEREST WORKS When it comes to investing, compounding helps your investments earn more money as the value of your investment goes up. Compounding can take effect in the following ways: Through interest. Compounding can amplify any interest earned on your investments based on a rate of return. The rate of return (RoR) is the average profit the investment achieves (or is expected to achieve) over a specified time period and is usually depicted as a percentage. This interest is added to your original investment, which in turn can continue to compound at a larger scale over time. Through dividends. This is a portion of earnings paid by companies to their shareholders based on stock performance...
eBook - ePubTeach Yourself About Shares
A Self-help Guide to Successful Share Investing
- Roger Kinsky(Author)
- 2020(Publication Date)
- Wiley(Publisher)
...This is known as simple interest because the dollar amount of interest (income on the investment) remains the same. As you receive income from the investment you don't spend it but instead reinvest it so the income adds to the capital invested. This means that your capital invested and income will both grow over the term of the investment. This is known as compound interest because the profit is re‐invested and compounds the value of the investment. Notes In the short term, compounding doesn't have much effect but in the long term it can make a huge difference. An interesting fact about compounding is that the higher the growth rate, the greater the effect of compounding. For example, over the long term, a 10% growth rate will generate far more than twice the growth in value that a growth rate of 5% will. If you are trying to build your wealth, the maths of compounding means that the sooner you jump on the bandwagon the better. The early years have a far greater effect than the later years. Compounding also works in reverse, so if you have a loan, the sooner you start to pay it off the better. Example Compare the profitability of an investment of $10 000 returning 10% pa over 10 years using simple and compound interest: Simple interest: With simple interest you take out the profit (and don't reinvest it), so your profit each year is $1000 and, after 10 years, you've received $10 000 total profit. Your capital of $10 000 has been returned to you but, in fact, because of inflation it's worth less in terms of today's purchasing power. Compound interest: You don't take out your profit each year but reinvest it. Now, your total profit is $15 930 so, because of compounding, you've made $5930 more profit. Furthermore your invested capital has risen from $10 000 to $25 930. This is a huge difference compared to the initial $10 000 invested! The calculations behind these figures are shown in table 2.1 (rounded to the nearest whole number of dollars)...
- John E. Grable, Ronald A Sages, Michelle E Kruger(Authors)
- 2020(Publication Date)
- The National Underwriter Company(Publisher)
...Keep in mind, however, that each of the strategies, techniques, and approaches presented in this chapter represent minimal competencies for a financial planning professional. Other calculation techniques will be presented throughout this book. It is, then, important to combine the material from this chapter with techniques from other chapters to develop a comprehensive understanding of the computational skills that an adept financial planner needs to exhibit on a day-to-day basis. Planning Strategy 1: Understand How Investors Earn a Rate of Return One of the most elementary of all personal finance calculations is determining the total return earned on an investment. Financial planners use this calculation to determine how much profit has been earned on an investment during a certain period of time. Rate of return describes the relationship between profit or loss relative to the amount saved or invested. For example, assume an investor deposits $1,000 into an account, the account has a stated rate of return of 6 percent, and the investor leaves the deposit in the account for one year. What will be the account balance at the end of the investment period? How much of the account balance is principal and how much is interest? How much will the account be worth in real terms if inflation —the general increase in the price of goods and services over time—averages 4 percent over the same time period? How much money will be available after paying taxes on the earnings? All of these questions are answered by using various rate of return calculations. To calculate that rate of return on an investment, all sources of income must be identified. The two most common sources of return are income and capital gains. In general, income is derived from periodic payments received by an investor, either in cash or as deposits to an account during the investment period. Examples include stock dividends, bond interest payments, mutual fund dividends, or savings account interest payments...
