The rate of return is the percentage gain or loss you make on an investment over a set period. It compares what you got back with what you put in.
In shares or funds it usually includes price moves plus any income, such as dividends, and sometimes fees. People quote it for a month, a year or the full time they held an asset, then often convert it into an annual figure to compare with other options.
What goes into a return: price, income and costs
At its simplest, return is about how much the value changed relative to your starting amount. In practice, a fair figure should reflect everything that added to or took away from your result:
- Price change: the difference between the sale price and the purchase price.
- Income: dividends from shares, coupons from bonds, staking yields or other distributions received while you held the asset.
- Costs: commissions, spreads, platform fees and any stamp duty or levies. Many headline returns ignore costs, yet they matter to your net result.
- Currency effects: if your asset is priced in a different currency from your base currency, exchange-rate moves also change your return.
Some reports show a price return that excludes income. Others show a total return, which assumes you reinvested income on the day you received it. Total return gives a truer picture of long-run compounding, especially for dividend-paying shares and funds.
How to calculate simple and annualised returns
Start with the holding-period return, which covers the whole time you owned the investment:
- Holding-period return (HPR): (Ending value + income − costs − Starting value) ÷ Starting value.
Example: You bought a share at £100, received £3 of dividends, paid £1 in costs, and sold at £112. HPR = (112 + 3 − 1 − 100) ÷ 100 = 14%.
If you held it for exactly one year, 14% is also your annual return. If you held it for 18 months, you might annualise it so you can compare with a one-year deposit or another investment:
- Annualised return: (1 + HPR)^(12 ÷ months held) − 1.
Using the same example across 18 months: (1.14)^(12 ÷ 18) − 1 ≈ 9.0% per year. Annualising converts uneven holding periods into a like-for-like yearly pace, capturing the effect of compounding.
For multi-year records, use a geometric average rather than a simple arithmetic average. Multiply the growth factors for each year and then take the nth root:
- Geometric average per year over n years: [(1 + r1) × (1 + r2) × … × (1 + rn)]^(1 ÷ n) − 1.
Traders who work with frequent, small moves sometimes quote logarithmic returns because they add neatly over time. For most everyday reporting and comparison, percentage returns as above are standard.
Time-weighted vs money-weighted: two ways to treat cashflows
Returns can be presented in two main ways depending on what you want to understand: the manager’s skill across time or the investor’s actual experience with money going in and out.
- Time-weighted return (TWR) strips out the effect of cash deposits and withdrawals. It breaks the history into subperiods each time money moves, calculates the return for each subperiod, then chains them together. This shows how the asset or strategy performed regardless of when you added money.
- Money-weighted return (MWR), also called the internal rate of return or IRR, gives more weight to periods when you had more capital invested. It is the discount rate that sets the present value of all cashflows to zero. It mirrors the investor’s personal outcome.
Why the difference matters: suppose a fund gains 10% in the first half of the year and loses 10% in the second half. The TWR is about −1% for the year because 1.10 × 0.90 = 0.99. If you doubled your investment right before the loss, your MWR would be lower than −1% because more of your money was exposed during the weak period. If you added money before the gain, your MWR would be higher. Fund factsheets often show TWR for fairness across investors. Your account statement may show MWR to reflect your own timing.
Nominal, real and total return
Three labels often appear around returns:
- Nominal return is the raw percentage change without adjusting for inflation.
- Real return removes the effect of inflation using the formula: Real ≈ [(1 + nominal) ÷ (1 + inflation)] − 1. If nominal is 5% and inflation is 2%, the real return is about 2.9%.
- Total return assumes income is reinvested. For dividend-heavy strategies this can be the main driver of long-term growth.
When comparing results across long periods, real total return is the most informative. It shows how much your purchasing power grew after inflation, with dividends or coupons rolling back into the investment.
Where you see rate of return and how it is used
You will see rates of return in broker statements, fund factsheets, indices, and in your own profit and loss tracking. Common uses include:
- Comparing investments: should you hold a share, a bond fund, cash or a crypto asset.
- Benchmarking a manager: did the fund beat a relevant index after fees.
- Reviewing a portfolio: which positions pulled their weight and which dragged.
- Setting goals: what annualised return you would need to reach a target by a certain date.
Platform dashboards may display both cumulative and annualised returns. The presentation varies by provider, so check which definition they use, whether income is included, and if returns are shown before or after fees. After-tax results depend on your personal circumstances and local rules, which vary and can change.
Limits and common mistakes to avoid
Return is a powerful yardstick, but context matters. Watch for these pitfalls:
- Ignoring costs and taxes. A headline return that excludes trading costs, platform fees or tax can flatter results. Net numbers tell the real story.
- Mismatched periods. Comparing a three-month return with a one-year return is misleading. Align periods or annualise both.
- Averaging percentages the wrong way. You cannot add or average raw percentages across periods. Use chained or geometric returns instead.
- Confusing price return with total return. Income can be a large part of the outcome. Check whether dividends or coupons are included.
- Overlooking risk. Two assets can show the same return, but one may have far larger swings. Many investors pair return with volatility or drawdown measures when judging a strategy.
- Small bases exaggerate percentages. A move from £1 to £2 is a 100% return, but the cash gain is only £1. Keep both the percentage and the pound amount in view.
- Currency blind spots. If your base currency is different from the asset’s, a strong or weak exchange rate can change the return you actually keep.
Used carefully, the rate of return helps you compare options, judge progress and hold strategies to account. Decide which version fits the job, include all relevant cashflows and costs, and match the time horizon to the decision you are making.