ROI can be used to compare your investment’s performance to similar investments, rank the asset within your portfolio, and get a sense of how profitable your investments are. While it can be a useful tool in this regard, ROI is only one of many data points you should look at when calculating success. It doesn’t reflect factors like taxes, opportunity cost, or any brokerage fees you may pay. 

In this article, we’ll discuss:

• How to calculate ROI
• How to define “good” ROI
• How to use ROI 

How to calculate ROI

You can calculate return on investment by dividing the net profit (how much you earned) by the cost of the investment, then multiplying that by 100 to get the percentage. 

ROI = (net profit / cost of investment) x 100

The cost of the investment is how much you initially paid for it. You can calculate the net profit by subtracting the investment’s cost from its current value.  

Example: calculating the ROI of a stock

Say you invested $1,000 in a single stock a few years ago and now decide to sell it. The stock has increased in value and is now worth $1,250. Here’s the calculation for your ROI:

ROI = (( $1,250 – $1,000 ) / $1,000 ) x 100

ROI = ($250 / $1,000) x 100

ROI = 0.25 x 100

ROI = 25%

It’s also possible to have a negative ROI if you sell an asset at a loss. Imagine you initially purchased a stock for $1,000, but it’s worth $950 when you decide to sell. In this case, your ROI calculation would be as follows: 

ROI = (( $950 – $1,000 ) / $1,000 ) x 100

ROI = (-$50 / $1,000) x 100

ROI = -0.05 x 100

ROI = -5%

Example: calculating the ROI of a stock that pays dividends

When calculating your return on investment for a stock that pays dividends, it’s important to consider all the profits you’ve gained over a certain period, not just the change in the stock’s value. This includes any dividends you’ve received.

For example, say you bought $1,000 worth of a company’s shares and later sold them for $950. But you also earned $200 in dividends while you owned the stock. The ROI calculation would look like this:

ROI = ((($950 – $1,000) + $200) / $1,000 ) x 100

ROI = (-$50 + $200 / $1,000 ) x 100

ROI = ($150 / $1,000) x 100

ROI = 0.15 x 100

ROI = 15% 

So, even though the value of your stock decreased, considering the dividends you received, your overall return on investment is 15%. This demonstrates how dividends can play a significant role in enhancing your investment’s overall profitability.

What is considered a “good” ROI?

What constitutes a “good” return on investment depends on many factors, including your personal risk tolerance, the time it takes for an investment to generate a return, and your goals. Risk-averse investors are more likely to accept lower returns in exchange for lower risk. On the other hand, those who are willing to take on more risk may chance a loss in their pursuit of higher ROI. 

And remember that ROI isn’t a static figure; it will shift as the value of a stock changes over time. For instance, say you invest in a stock that’s experiencing very rapid but unstable growth. That investment might generate a very high ROI of 30% one year, but plunge to a much lower number the following year due to volatility in the share price.    

What is the average stock market ROI?

The average stock market return is about 10% per year as measured by the S&P 500 index. Because of this average, many investors consider 10% a “good” ROI for stocks. But even this is an imperfect measure because the stock market can rise or fall, sometimes dramatically, in a given year. Therefore, many experts suggest that a realistic measure of “good” ROI is 5-7%. 

If you’re looking at your investments’ ROI for a single year, it might be worth comparing your portfolio’s return that year against the S&P 500’s overall return in the same year instead of the 10-year average. 

Stock market volatility is one reason that investing in a well-diversified portfolio over the long term is often recommended over a short-term investing strategy: it helps you ride out volatility so you won’t be as impacted by big drops in the market.

How to use return on investment

ROI is a relatively straightforward calculation that investors can use to judge the profitability of an investment. While it doesn’t tell the whole story, it allows you to evaluate performance at a glance. You might use a negative ROI to identify struggling investments and a positive ROI to see which assets are generally doing well. This information can come in handy when deciding whether to hold onto an investment or sell it. 

Remember to look at the return on both your individual investments and your entire portfolio. When you diversify your portfolio, you’ll hold many types of investments. If some have a low or even negative ROI at the moment, those with positive ROI can balance out those losses. When diversified, your portfolio’s overall return is less likely to be heavily impacted by a single stock’s change in value. 

ROI limits and benefits

Of course, ROI isn’t an all-encompassing data point. This statistic comes with some distinct benefits as well as some limitations. 

When considering the performance of your investments, use ROI alongside other data points like: 

• Time-weighted returns: Time-weighted returns are a measure used in finance to assess the performance of an investment portfolio, accounting for the impact of external cash flows. It helps you see how your investment choices perform without being swayed by when you put money in or take it out.
• Return on equity (ROE): Return on Equity is a financial ratio that evaluates a company’s profitability by comparing net income to shareholders’ equity. It tells us how good a company is at making money from the money its owners have put in.

Use these as well as all the costs associated with investing, such as management and trading fees charged by your brokerage. 

Return on investment: the bottom line

Understanding your return on investment is one way to get a sense of your portfolio’s profitability. ROI can also be helpful when you start investing as a way to compare the return of two investments and evaluate the pros and cons of high-yield investments. It may also help you determine how much you should be investing to reach your goals based on your time horizon. 

If you’re ready to begin your investing journey, Stash can help you find the right options for you unique risk tolerance, goals, and budget. 

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Start today with any dollar amount.

Get Started

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While this number can give you a general sense of how the stock market may perform over time, additional context is helpful for understanding what it means for your investments. 

First, keep in mind that the S&P 500 is a market index, not the stock market itself. It tracks the prices of the 500 largest U.S. companies, which make up 80% of the stock market’s total value. That’s why it’s considered a useful guide for tracking the performance of the stock market overall. 

Second, remember that the average stock market return is just that: an average of the market’s performance over many years. In any specific year, you’ll likely see a higher or lower return than the average. The value of your assets will also be impacted by inflation, the period of time your investment is in the stock market, and what assets you’ve invested in. 

It’s very difficult to predict exactly what your expected return will be in any given year. It’s even more difficult to predict the performance of a single investment. But if you’re investing for the long term, the average stock market rate of return can give you a sense of how you might expect your stock portfolio to perform over time. 

How are stock market returns measured?

Stock market indexes are commonly used to understand the stock market and its performance. In addition to the S&P 500, investors commonly look to the Dow Jones Industrial Average, which looks at 30 firms across industries, and the NASDAQ Composite, which looks at over 3,700 stocks listed on the NASDAQ exchanges, to judge market performance. These indexes reflect slightly different average rates of return because they each evaluate different collections of stock prices.

Average 5, 10, 20, and 30-year S&P 500 returns

If you look at the S&P 500’s historical annual returns by year, you’ll see that there’s quite a bit of variation from year to year. The last five years are a good example of why the average stock market return may not be a reliable indicator of market performance for any single year. For instance, 2022 brought a 19.44% decrease in performance, but 2021 saw a 26.89% increase. This is why the annualized return, which is the average return over a period of time, can be a more useful way to gain insight into the bigger picture of average stock market returns.

Factors that impact the stock market

Historically, the stock market has gone up in more years than it’s gone down. But the market’s performance is impacted by a number of factors in any given time period, including:

• Supply and demand
• The state of the economy 
• Inflation
• Interest rates
• Major world events like wars, unrest, and natural disasters
• Fluctuations in consumer spending

The stock market goes through a natural cycle of bear markets, which are market downturns, and bull markets, when returns tend to trend upward. Investors commonly watch these factors to recognize trends and attempt to predict potential market-wide performance. People might also watch these same factors on a micro level, focusing on how they may impact a particular business or sector they invest in. 

Average stock market returns and inflation

A 10% return on your investments won’t necessarily mean a 10% increase in the real-world value of your earnings. This is because inflation can cut into your money’s buying power. For example, the average inflation rate over the last 62 years was 3.8% per year. So, on average, an item that cost $100 in 1960 would cost about $1,004 in 2022.   

How does this apply to your investments? Say you invest $1,000, leave your money in the market for 10 years, and see a 10% rate of return on your investment; you would have earned $100 in returns. But depending on the inflation rate over those 10 years, your $100 may have less buying power when you sell your stocks than when you initially invested. It may be worth keeping in mind that the average stock market return tends to outpace inflation over time, which is one reason investors may see investing in the stock market as a hedge against inflation. 

The Bureau of Labor Statistics calculates inflation using the Consumer Price Index (CPI) by gathering spending data across a basket of commonly purchased goods and services. You can use a CPI Inflation Calculator to estimate the inflation rate over a specific period of time. 

Average stock market returns and market volatility

The stock market is volatile; stock prices are constantly rising and falling, sometimes dramatically. If you compare the market’s performance over two different periods of time, you’re likely to see that returns were impacted by what was happening in the world and the market during each period. 

In the last 30 years, for example, several events caused sharp changes in average market returns during specific eras, such as the “dot com bubble” burst in the 1990s, the “great recession” of 2007-2009, and COVID-19-related market upheaval in 2020. The overall stock market doesn’t need to experience a major crash or boom for volatility to impact the value of your assets.

What is a “good” stock market return?

What constitutes a “good” stock market rate of return depends on a variety of factors unique to each investor, including your financial goals, risk tolerance, and time horizon. For example, it’s common for younger investors to focus on securities that may have more risk in the short term but higher potential returns many years or decades down the road. On the other hand, investors who are closer to retirement may move money from more volatile assets to those with more overall stability, even if returns are lower. 

That said, many experts suggest that a 10% or higher rate of return is often considered “good” for stocks because it reflects or outpaces the average stock market return. After adjusting for inflation, a return of around 7% might be considered “good.”

For lower-risk investments, like government bonds, a return of 5% or higher might be considered a “good” return because investors see the benefits of stability as worth the trade-off for higher potential rewards. 

Maximizing returns with buy-and-hold investing

A buy-and-hold investing strategy is one way investors can take advantage of the stock market’s 10% average rate of return. This approach involves building a diverse portfolio and holding onto those investments for many years in order to ride out year-to-year market fluctuations.

Index funds can be a key component of this strategy, as they aim to mimic the performance of a broad market index. An index fund that tracks the S&P 500, for example, is likely to reflect the average stock market return reflected by that index.

Buy-and-hold investing also helps you take advantage of compounding. Compounding refers to multiplying your returns by continuously earning interest on the interest you’ve already earned. It’s another way to potentially magnify your earnings over time by simply leaving your money in the market. 

How to invest in the stock market

If you’re ready to start investing in stocks, the average stock market return is one concept that can help you understand the world of investing. You may also wish to familiarize yourself with other key stock market statistics as you build your knowledge. 

The good news is, you don’t have to become an overnight expert to dip your toes into investing. Stash’s emphasis on education empowers you to learn gradually, fostering financial confidence as you navigate your investing journey.

Investing made easy.

Start today with any dollar amount.

Get Started

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There are a number of different ways to measure portfolio returns, and there are different reasons why you might choose one calculation over another. With our Smart Portfolios¹, we use something called a time-weighted return (TWR). It’s a standard industry calculation that essentially measures the return on your investments, and removes considerations of any additions or subtractions of capital.

Time-weighted return defined

Time-weighted return is a commonly-used calculation when someone else is managing your portfolio for you, because it removes the impact of any deposits or withdrawals that you may make, but which they cannot control. For example, Stash cannot control when you deposit money into, or withdraw money, your Smart Portfolio. 

Although it may sound complicated, TWR really measures how well Stash is managing your money, and how your Smart Portfolio is performing.¹ Returns calculated using other methodologies, which can include your deposits or withdrawals, easily become distorted, and can give you an inaccurate picture of your portfolio’s performance.

For example, another calculation called a simple return takes into consideration the timing of your cash flow into or out of your portfolio, and it measures the actual dollar amount earned on your portfolio, indicating the change in the total investment value. This is a factual calculation, but it may not properly reflect the portfolio manager’s investment strategy.

Time-weighted return in action

Take a look at the following example, where we have two fictional investors who deposit money in different months, into the same hypothetical portfolio. The impact of the cash flow is removed from the weighted return calculation, so the monthly time-weighted return experience is the same regardless of whether someone deposited money.

*Remember all investors are different, and you must take into account your own financial situation and goals when investing.  All investing involves risk, and it’s possible to lose money in the market. The Hypothetical below is purely for illustrative purposes and does not represent the actual performance of any client nor does it reflect the performance of any of the underlying investments therin.

This hypothetical does not account for fees or taxes. It is for illustrative purposes only and is not indicative of any actual investment. Actual return and principal value may be more or less than the original investment. Investing Involves Risk, including the loss of principal. 

Positive time-weighted return and negative dollar value

Investor A and Investor B both start out by investing $100 in the portfolio, which has a +20% return in January, followed by a -10% return, or loss, in February. 

In January, Investor B makes a $100 deposit into the account right before the market upswing, while Investor A does not. Since Investor A’s holdings are smaller, his or her gain would be $20  in January. In comparison, Investor B invests more money, and gains $40 that month. 

In February, let’s say Investor A makes a $100 deposit into the account, while Investor B does not. The opposite happens here: Investor A buys right before the market dips, resulting in a $22 loss, and a $24 dollar loss for Investor B. 

While both investors have an 8% gain for the two months, Investor A loses $2, while Investor B makes $16. That’s because Investor A contributes to the market right before a market dip, while Investor B contributes right before the upswing. Investor A’s poor timing has an impact on the actual dollars earned (or lost in this example), while the portfolio’s investments actually have a positive return during the same time period. 

Our investing philosophy

We recommend following the principles of the Stash Way when you’re investing: Think long-term, invest regularly, and diversify. By investing regularly, investors will sometimes put money into the market when prices are higher, and at other times when they’re lower. Over time, you’re likely to get a better price-buying experience.

Remember though, all investing involves risk, and you can always lose money in the market.

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It’s a great question, and I wanted to take a moment to describe how we make our decisions.

How we choose funds

When it comes to selecting the funds we offer on Stash, we have a very deliberate and purposeful investment strategy. In fact, all of our decisions begin with an internal investment committee that carefully screens every fund and stock that you can purchase, with a goal of giving you the broadest exposure to the market possible.

We primarily offer exchange-traded funds (ETFs), which are baskets of securities that trade on an exchange, and either follow an index or some other specific set of investing guidelines. Our objective is to offer ETFs that are straightforward and follow a transparent process for security selection, based on concrete rules.

By holding these types of funds, we think investors can reduce risks that the performance of their holdings will deviate significantly from the indexes that the ETFs track, or the investment approaches that the funds have chosen.

In short, you as investors will have an idea how your investment can perform over time, based on market conditions.

Investing in what matters to you

That goes equally for a fund that may follow an index of companies that have social goals to promote worker equality, or one that might follow the stock picking strategy of large hedge funds.

Stash also chooses ETFs from the leading fund providers. Blackrock’s iShares, Charles Schwab, PIMCO, State Street Global Advisors, and Vanguard, are a few of our fund companies, and they are among the most recognized names in the investment world. These companies have long track records creating some of the most successful funds in the industry.

Additionally, our ETFs represent important economic sectors, which will can give  you the broadest possible exposure to markets. These include equity funds that focus on consumer staples, energy, financial services, healthcare and technology, to name a few. The funds also allow you to invest in both corporate and government bonds.

We want the mission of each fund to be clear, so our investors know what they’re buying.

All of our funds must also follow easily recognizable themes. For example, our funds might follow companies innovating in sustainable energy, or pushing the envelope on robotics, or companies actively seeking to conserve and supply water globally.

Finally, while accounting for all the considerations above, we try to minimize the costs associated with owning and trading an ETF, to help you maximize your returns.

You can buy fractional amounts of those funds, starting with just $5, making it simple to invest in a lot of things that interest you without spending a lot of money.

Explore all the funds we offer on Stash here.

How we choose single stocks

But Stash also lets you purchase single stocks of several dozen prominent U.S. companies. (More specifically, we let you buy fractional amounts of those stocks, as the individual price per share of some stocks might be quite high.)

And many of the same principles we apply to picking our ETFs, we also apply to the stocks we offer for sale. We choose primarily “blue chip” stocks, from some of the largest and most easily recognizable companies in the world. These companies typically have a long record of trading, with strong revenue, and profits.

The individual stocks we offer must also be from companies that have a market cap of at least $10 billion, and they must be liquid stocks.

That means there’s typically a high market demand for the shares, and they can be easily bought and sold by investors. The individual stocks we choose also can’t be thinly traded, which means the volume of shares traded on a daily basis must exceed $50 million.

Most important, we try to offer stocks that you’ll be interested in. These include a broad range of selections, from innovative technology companies to classic U.S. consumer products companies.

What you won’t find Stash selling are lesser-known stocks that are traded on unknown exchanges, or stocks from foreign companies that haven’t established a significant U.S. presence.

Explore all the individual stocks we offer on Stash here.

We’re always working for you

Here’s something else to keep in mind: Every quarter we carefully monitor the individual stocks we offer. If they fall below our criteria, we remove them from our list.

At Stash, our goal is to help you build a diversified and successful portfolio that will allow you meet all of your financial goals, whether that’s purchasing a home, saving for retirement, or some other objective with your money. We want to be here for you now, and in the long-term.

The post How Stash Chooses Investments To Help You Build Your Portfolio appeared first on Stash Learn.

What is investment performance?

Performance, as it relates to your investment portfolio, usually refers to the returns you’re seeing on your investments.

What’s a return? A return is either the monetary gain or loss on your portfolio Naturally, investors want positive performance, results from a positive return. A negative return, in which your portfolio actually loses money, would signal negative performance.

In other words, “performance” describes how your investment portfolio is doing.

Simple, right?

What determines my portfolio’s performance?

Your portfolio’s overall performance will hinge on a number of variables. But mostly, the holdings — or assets — contained in your portfolio will determine whether you see positive or negative returns.

Your holdings are subject to market conditions. That means that sometimes you’ll be in the red, other times you’ll be in the black. Markets tend to move in cycles, and downturns often swing around into gains — and vice versa. Your portfolio’s performance will probably mirror what’s going on in the market.

Measuring performance

How can you measure your performance? The two key metrics for gauging performance are called yield and total return. Both measure your portfolio’s performance, but do so with differing degrees of exactness.

Yield is essentially the income generated by an investment–whether that’s a coupon from a bond, or a dividend payout from a stock.

Total return, which is generally considered a more precise measure of performance, is the yield plus the percent change in price for a bond, stock, or a fund.

Both yield and total return can help you gauged performance.

Can I improve my investment performance?

There’s, unfortunately, no magic formula to ensure that your portfolio always performs well.

But that’s not to say that there aren’t things you can do to try and improve your portfolio’s performance. In fact, there are numerous strategies and tactics you can engage in to boost your returns or buffer yourself from the volatility of the markets:

• Diversify your portfolio with a mix of stocks, bonds, ETFs, and other assets
• Buy and hold: Engage in a ‘set it and forget it’ investment strategy
• Automate your savings and investing with features like Auto-Invest

The post What is Investment Performance? appeared first on Stash Learn.

In a recent financial literacy survey, Stash found that over 25% of people expect a return of 16% or higher on a moderate risk fund after one year*.

While we applaud these investors’ enthusiasm, we thought this was a great opportunity to talk about what to expect when you’re making a moderate risk investment.

Investing: What is a realistic expected return?

Here’s the thing that all investors should know. The market is going to experience peaks and valleys. There will be great years, and there are going to be, well, not so great years.

A moderate risk investment might show a return of over 20%, which happened in 2009. It wouldn’t be an anomaly, it would just be a part of the fluctuations of the market. However, in a bad year, you could see a return of -18% (which happened in 2008**).

If you look at the S&P 500 index over the course of 10 years (2013 – 2022), the average return is over 7% if you don’t adjust for inflation***. That said, if you’re a moderate risk investor, your portfolio will likely also include bonds. Bonds, which generally have a lower rate of return than stocks (in exchange for lower risk), may lower the return of your overall portfolio.

So as you can see, it’s not so simple to give a number when it comes to an expected return.

Dividends and Interest Payments  

Moderate risk exchange-traded funds or ETFs make up the majority of the investments found on Stash. ETFs are a type of investment that more often than not tracks an index.

If you’ve got both equity and debt (stocks and bonds) in your portfolio, you may receive interest payments on your debt investments and dividends on your equity investments.

(Confused? Check out: Debt & Equity, What Every Smart Investor Needs to Know)

So you’re expecting some dividends and interest payments, but when should you expect them?

ETFs distribute dividends and interest according to the schedules of the underlying securities of the funds. So if you have a nice diversified portfolio, distributions could occur at different times during the year.

While dividends and interest are typically paid out quarterly, investments all have different schedules for when distributions are made.

Moderate risk exchange-traded funds or ETFs make up the majority of the investments found on Stash.

Stash and dividends

At Stash, we shoot you an email when you receive a dividend or interest payment. These payments may seem usually pretty small at first, because they are based on the amount you have invested. But if you stick with it for the long term, they can really add up!

As always, if you want to know more about the distribution history for a particular investment, check out the fund’s website, which you can find linked in all of our investment profiles.

BONUS: The Rule of 72

This rule can be pretty handy when estimating potential returns.

Here’s how it works: Take the number 72 and divide by the expected return you think you’ll get per year. That’s how many years it will take for your initial investment to double, assuming a fixed rate of return.

For example: 72 divided by 5 percent means it will take 14.4 years for your money to double.

The post What to Expect When You’re Investing: Getting Realistic About Returns appeared first on Stash Learn.

If you’re willing to take the risk of asking for a higher salary, you’re probably weighing the risk of your request with the potential reward. (That’s called risk management.) You might be familiar with risk in your personal or professional life – but what does risk mean for your investments?  

What is investment risk?

Investment risk is the uncertainty of your investment’s future returns. This includes the possibility that your future return may not match the expected return. And this mis-matching of expectation and reality could negatively affect your financial welfare.

In other words, the performance of your investment may not be as successful as you hope. If you invest $100 every month, with the goal of a $7 (7%) return, you run the risk that the return on investment may be lower (or even a negative). But remember! A low expected return in the short term shouldn’t stop you from thinking long term.

Risk and investing in ETFs

Stash investments are categorized by risk level. And when it comes to foundational investments, Stash offers diversified mixes.

Each mix has a certain ratio of stocks to bonds. A greater allocation to stocks generally makes an investment more aggressive, just as a greater allocation to bonds generally makes an investment more conservative. What’s your mix? It’s all about figuring out your own taste for risk.

Risk management: How does it relate to your Stash?

Remember those personal questions we ask you in sign-up about your age and income? We’re not just asking you because we are curious. All of this information helps us diagnose your risk profile. This is based on your financial situation and investing goals.

A risk profile combines the amount of risk you are willing to take and the amount of risk you are able to take, based on those inquisitive sign-up questions. We place investors into a conservative, moderate, or aggressive risk level, and we make available suitable investments to match. 

If you’re risk averse (aka you’re not down for that risky investing business), you may be sorted into a conservative or moderate risk level. It’s also important to note that Stash won’t show you investments that don’t match your risk level.

We take our fiduciary responsibility seriously and want you to invest according to not only your beliefs and goals, but also in a responsible way that keeps the long term in mind.

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