In many previous blog posts, we have described the value of periodically checking on your investments to assess their performance over time. As you may already know, by taking this initiative, you can determine whether or not to make changes to your portfolio. Ultimately, checking the performance of your assets over time can help you to align your portfolio’s progress with your overall investing goals.

However, while you may understand the benefit of checking on your investments periodically, you may not realize that there are many ways in which you can do so. The first of these methods is to calculate your assets’ real returns. In this article, we will explain how to calculate real return over a period of time and why this calculation can have serious effects on your own understanding of your portfolio.

Real return is typically calculated for each individual asset within a portfolio, so that investors can see which assets are underperforming or performing very well. To calculate an investment’s real return, you must first find the value at which you purchased the asset. For example, if you purchased a share of Stock X two years ago for $10, this would be your initial value. Then, to compare these values, you must know the value of the asset today. For example, if the stock is trading for $20 today, you would use this number in your calculations. Of course, these values are simple to find for stocks because you likely have electronic records of the stock’s prices over time, given by your brokerage platform.

Next, you will want to find any income you have received from the investment since you’ve owned it. These numbers might include any dividends, rent (if you’re calculating for real estate), or interest you’ve made over time. Finally, you’ll want to find the rate of inflation over the time, which you can find online.

After you’ve found all of these components, you can start your calculation. First, you’ll want to find the difference between the price of the asset today ($20) and the price of the asset when you bought it ($10). This simple math will leave you with a $10 difference. Then, you’ll add in any income you’ve received since you’ve owned investment. For example, if you made any dividends, you would add them here. Next, you’ll use this time to subtract any fees (such as trading fees) you’ve paid during the period for this investment. By taking these steps in order, you will have found the actual return of the asset since you’ve owned it.

If you divide this number by the initial value of the investment (the $10 you paid to purchase it originally), you will have the rate of return. In this case, if we assume that you made no dividends and paid no trading fees, your rate of return would be $10 divided by $10 – or 100%. Finally, you’ll want to deduct the rate of inflation over the period of time. Doing so will get you closest to the real rate of return that you’ve made over the period in which you’ve held the asset.

After all of these simple steps, your calculation is done! Now, you can calculate the real rate of return for the other assets you hold in order to determine which assets you’d like to hang onto for a longer period of time and which assets may be performing below your expectations. As we’ve said, this can help you to structure your portfolio so that it is most in line with your overall investment strategy. Stay tuned for our next article about assessing the performance of your portfolio through using a benchmark calculation!