It's important to regularly evaluate how well your investments are doing. The math involved does scare some people, though, so let's run through an example. Imagine Ethel, who begins the year with a portfolio valued at $10,000. At year's end, it's worth $14,000. Let's see how it grew:
Divide $14,000 by $10,000, and you get 1.4. Subtract 1 and you have 0.4. Multiply that by 100, tack on a % sign, and voila -- you've got a 40% increase. It's that simple, sometimes.
If Ethel added to her investment during the year, though, as many people do, things get more complicated. Let's say Ethel plunked $2,000 of her hard-earned savings into this portfolio during the year. This means her investments didn't really appreciate by 40%. The total value of her portfolio did, but partly because of the money she added. Even if the stock prices didn't budge, her contributions would have resulted in a 20% increase.
If you make intra-year contributions, it suddenly becomes difficult to calculate your actual return. Ideally, you'd need to use a computer program that can determine the "internal rate of return," or IRR. Software such as Intuit's Quicken or Microsoft Excel can do this.
Your trusty calculator can give you an approximate value. Just take the portfolio's end value and subtract half the net additions made. Divide this by the portfolio's beginning value, to which has been added half the net additions. We'd get: ($14,000 minus $1,000) divided by ($10,000 plus $1,000) equals 1.18. Subtract 1, multiply by 100, tack on that % sign, and you're looking at an 18% gain.
Once you know your holdings have appreciated a certain amount, compare that with a benchmark such as the Standard & Poor's 500. If your portfolio rocketed ahead 15% in 1999, you may have rejoiced. But the market (as measured by the S&P 500) was up about 20% for the year. You underperformed it. Aim to beat the market -- or, with the help of index funds, at least to meet the market average.
To learn more about investing Foolishly and how the business world works, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees).
You can also learn all about brokerages and find one that's right for you in our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)