# Investment: Rate of Return

“Yuppy! My investment has given me a return of 10%!” It sounds great but holds on first.

It will be more meaningful if we consider the time frame of investment with this return. If the return of 10% took a period of 3 years to achieve, the average return per year is about 3% only. If it took a period of 5 years, it will be only 2% p.a. If this is the case, you may find that such return does not mean much.

Money value is actually depreciated in time. The value of \$100 today will be greater than the value tomorrow. The logic is very simple. If you put \$100 into your savings account today and keep it until tomorrow, the bank will pay you interest. In your savings passbook, the balance value will be \$100.01 based on 3.5% p.a.

Under normal circumstances, if you are a conservative investor, you may use the bank’s one-year FD rate or inflation rate to judge your investment performance. If we are able to outperform this basis, we will be able to achieve our financial objective at a faster pace. For aggressive investor, we can adopt share index as a benchmark. In short, which benchmark to be used to judge your investment performance will totally depend on your risk going to be taken.

To calculate the average yearly rate of return, the formula is:
(((1+r/100) ^ (1/n))-1)*100

where,
r = total rate of return
n=investment time frame

For example, 10% rate of return in 3 years shall be calculated as follow:

r = 10 (i.e. 10%)
n = 3 (i.e. 3 years)

Therefore, the average annual return = (((1+10/100) ^ (1/3))-1)*100 = 3.228 (i.e. 3.228% p.a.)

Happy investing.
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