Return on investment (ROI) is one measure of an investment's success. It directly measures the return on that investment relative to its cost. To calculate ROI, the return of an investment is divided by its cost. This is useful as a crude gauge of how effective an investment is to a portfolio. This method can also be used to measure and evaluate an entire portfolio.

## Calculating Returns for an Entire Portfolio

The first step in calculating returns for your investment portfolio is identifying and gathering the requisite data. Once you have the data prepared, there are several considerations to make before performing the calculations.

Begin by defining the time period over which you want to calculate returns (daily, weekly, monthly, quarterly or annually). You need to strike a net asset value (NAV) of each position in each portfolio for those time periods and note any cash flows, if applicable.

## Holding Period Return

Once you have defined your time periods and summed up the portfolio NAV, you can begin calculations. The simplest method to calculate a basic return is called the holding period return. It simply calculates the percentage difference from period to period of the total portfolio NAV and includes income from dividends or interest.

Holding period return/yield is a useful tool for comparing returns on investments held for different periods of time.

## Adjusting for Cash Flows

If money was deposited or withdrawn from your portfolios, you will need to adjust for the timing and amount of cash flows. For example, when calculating a monthly return, if you deposited $100 in your account mid-month, the portfolio end-of-month NAV has an additional $100 that was not due to investment returns. This can be adjusted using various calculations, depending on the circumstances. For example, the modified Dietz method is a popular formula to adjust for cash flows. Using an internal rate of return (IRR) calculation with a financial calculator is also an effective way to adjust returns for cash flows. IRR is a discount rate that makes the net present value zero. It is used to measure the potential profitability of an investment.

## Annualizing Returns

For multi-period returns, a common practice is to annualize returns. This is done to make the returns more comparable across other portfolios or potential investments. It allows for a common denominator when comparing returns.

An annualized return is a geometric average of the amount of money earned by an investment each year. It shows what could have been earned over a period of time if the returns had been compounded. The annualized return does not give an indication of volatility experienced during the corresponding time period. That volatility can be better measured using standard deviation.

## Example

For example, the sum total of the positions in a brokerage account is $1,000 at the beginning of the year and $1,350 at the end of the year. There was a dividend paid on June 30. The account owner deposited $100 on March 31. The return for the year is 16.3% after adjusting for the $100 cash flow into the portfolio one-quarter of the way through the year.