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Since many people understand the stock market, almost all the examples showing how to use Investment Return use common stocks to describe how to use the calculator. The Inv. Return and Dividend calculators can be used for investments in Real Estate, Bonds, and to determine Portfolio Returns in certain situations. The Retirement calculator only deals with the retirement situation. Some examples of how to use Investment Return for other investment types are shown below.
Portfolio Return:
One return that is important to an investor is the average return on their entire portfolio over time. This tells them how good an investor they are and guides them in the decision of whether to make investment decisions themselves, or to seek the advice of investment professionals.
Computing the return of an entire portfolio over time is difficult and potentially involves inputting lots of additions to capital and withdrawals from capital. The iPhone/IPod is a wonderful device but it was a deliberate design decision in Investment Return to limit the number of inputs because inputting numbers on an iPhone/IPod is not as easy as with a keyboard. So the input of multiple additions to capital and withdrawals from capital was ruled out for this release of Investment Return.
One common Investor scenario will allow you to compute the return on a significant portion of your portfolio using Investment Return. Many people have an IRA that started with one investment amount (typically a 401k payout after leaving a company) and then that starting amount grows or shrinks according to how it was invested. Suppose you started an IRA with $100,000. You put the 100k in a brokerage account and made various stock and bond investments. The mutual funds you bought made capital gain distributions at the end of the year, your dividend stocks paid dividends, you bought stocks that went up in value, sold them, and bought other stocks. Over time your IRA will increase or decrease in value, depending on how good the investments you make in the IRA are. If you made no additions (you don’t add external money to the account, dividends and capital gain additions inside the account are OK) to the IRA other than the initial 100k during your holding period for the IRA and make no withdrawals from the IRA during the holding period, you can compute your average return on your IRA as follows.
Scenario: an IRA was started on 3/15/2002 with 100k and on 10/30/2009 it was worth 232k.
Inv. Return Calculator Inputs:
Set Purchase Date to March 15, 2002 (date you funded your IRA)
Set Purchase Price to 100000. (amount you put in the IRA)
Set Sale Date to Oct 30, 2009 (current date or another sale date you want to know about)
Set Sale Price to 232000. (current value of your IRA, although you are not really selling)
Tap Compute Return
Inv. Return Outputs:
Return will show that the return for this example is 11.0310 per cent. This is the average annual return, compounded daily on your IRA. That is a good return for this time period compared to the Dow or S&P benchmarks. 11.0310 per cent is a much better return than you could have gotten from any low risk bond.
You may have a situation where you made some additions or withdrawals to your IRA during the holding period. The Time Value of Money makes it incorrect to simply add your contributions to the IRA to the Purchase Price and add the withdrawals from your IRA to your Sale Price (the fact that you used money from your IRA is not a measure of how well you invest). If you made few withdrawals/contributions to your IRA during the holding period and they are symmetric in terms of time periods (you held your IRA for 10 years, at the end of the first your you made a 10k contribution and at the end of the 9th year you made a 10k withdrawal) you can get a rough idea (not the precise actual return, although Investment Return will give you a number) of what is going on by adding your contributions to the purchase price and adding your withdrawals to the Sale Price.
One other way to get some idea of your Portfolio Return is to compute your net worth at the beginning of the year and at the end of the year and adjust for any external additions or withdrawals to the beginning and ending balances. An example of an external addition might be inheriting 200k or contributing 15k (10k your contribution, 5k your employer contribution) to your 401k. An example of a withdrawal from your net worth might be taking 30k out of a taxable account to buy a car (buying a car does not detract from your investment ability) or withdrawing money to send your child to college. You do NOT include as an addition to year begin net worth rents you received, dividends you received, or capital gains you received. Rents, dividends, and capital gains are part of the return you receive on your net worth at the beginning of the year. Input the final beginning and ending balances as your Purchase Price and Sale Price respectively in Inv. Return to get a rough idea of your annual return for the year on your measured your net worth. If you do this over a number of years, you’ll get some idea of what your average portfolio return is.
Using Investment Return for Real Estate Investments.
Raw Land Investment
Scenario: You buy some raw land for cash on Feb 15, 2002 for 100,000. You sell it for $175,000 on Dec 20, 2007. Return calculation doesn’t take into account any rent, property taxes or expenses.
Inv. Return Calculator Inputs:
Set Purchase Date to Feb, 15, 2002.
Set Purchase Price to 100000.
Set Sale Date to Dec 20, 2007.
Set Sale Price to 175000.
Tap Compute Return
Inv. Return Outputs:
Rental Property Investment
Scenario: You buy a rental property for cash on Sep 10, 1998 for $300,000. You receive after all expenses and taxes $15,000 a year in net rent. You sell the property on March 14, 2006 for $500,000.
With Dividend Calculator Inputs:
Set Purchase Date to Sep 10, 1998.
Set Purchase Price to 300000.
Set Sale Date to March 14, 2006.
Set Sale Price to 500000.
Set Dividend to 15000.
Tap Compute Return
With Dividend Outputs:
Using Investment Return for Bond Investments.
Bond Investors tend to be more aware of their returns than other investors but Investment Return can help with Bond Investments too, particularly the capital gain/loss part. Here’s an example.
Scenario: You buy a 100k face value bond at a discount for $90,000 on April 12, 2005. It has a 5% coupon rate and pays you $5,000 in interest a year. Interest rates move down while you hold the bond and you sell the bond for $105,000 on December 18th, 2008.
With Dividend Calculator Inputs:
Set Purchase Date to Apr 12, 2005.
Set Purchase price to 90000.
Set the Sale Date to Dec 18, 2008.
Set Dividend to 5000
Tap Compute Return
With Dividend Outputs:
Using Retirement as a Future Value Calculator.
By setting Annual Contribution to 0 you can use Retirement as a Future Value calculator. Here is an example using saving for a child’s College education as an example.
Scenario: I have a $150,000 college fund now. I have 1 child who will go to college in 10 years. I anticipate that college will cost 60k a year when they go to college. If I make no more contributions to their college fund, will I have enough money to send both children to college in 10 years? I assume I can make a 5% return on the college fund for the next 10 years.
Retirement Calculator Inputs:
Set I Now Have to 150000.
Set the Interest Rate picker to 5%.
Set the Annual Contribution to 0.
Retirement Outputs:
Xxx shows at the top of the screen.
So you do have the $240,000 nominal dollars you will need for your child’s college education. Depending on what kind of account (taxable, 529) you saved the money in, you have tax issues withdrawing the money to pay for the college expenses.
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