How to Calculate Your Portfolio Returns?
All of us invest our money in order to generate massive returns on them. Sometimes, the scope of returns on investments determines the choices of assets that the investors make. But how can we know about the profits without actually making investments? Well, it’s pretty easy. Expert investors have been calculating their portfolio returns for a long time. They have been able to make superb investment decisions. If you are also looking for a way to calculate your portfolio returns, this is the perfect guide to help you.
What Do We Mean By Portfolio Returns?
A portfolio refers to the group of investments done by an investor over some period of time. The investments may belong to a diverse class of assets such as precious metals like gold and silver, gold stocks, silver stocks, Gold ETFs, Silver ETFs, cryptocurrencies, and so on. Portfolio returns mean the profitability achieved by the investors by investing in assets and holding them over a certain period of time.
How to Calculate Portfolio Returns?
To calculate portfolio returns, investors must be aware of the weight of each type of security in their portfolio and their expected returns. Following this, the weight of each type of security is multiplied by the expected returns. Similarly, the investor should calculate this product for each type of security and then add them up to find out the overall portfolio returns. Here’s how to do that in four simple steps easily.
Determining the Returns
The first step to calculating portfolio returns is to find out the returns for each type of security in your portfolio. Let’s say you have four types of investments in your portfolio, that is, A, B, C, and D. You will need to look at the historical data about the returns that the investors have earned by investing in these securities over a specific period of time. Please note here that you should be consistent in tracking the time period of investments across all the securities. In addition to this, you don’t need to take any geopolitical, market, economic, or any other factor into consideration. Mark the returns for A, B, C, and D as P, Q, R, and S respectively.
Determining the Weight
Secondly, you need to determine the weight of each type of security in your entire portfolio. To find the weight of security, you need to divide the amount of money that you have invested in a security by the total amount of money that you have invested to build your portfolio. Say you have invested W amount of money in security A and the total investment amount of your portfolio is T, you can determine the weight of security A in your portfolio by dividing W by T, that is W/T. Similarly, find out the weights for each security B, C, and D as well. Mark the weights of A, B, C, and D in your portfolio by K, L, M, and N respectively.
Taking the Product
Now, take the product of the returns for each security and its weight in your portfolio. For example, multiply the returns of security A that is P with the weights of security A in your portfolio that is K and find out the number. Do this repeatedly until you find the product for each security A, B, C, and D. Label the products for A, B, C, and D as E, F, G, and H respectively. (where E=PXK, F=QXL, G=RXM, and H=SXN)
Adding the Products
The last step to calculate portfolio returns is to add the products and find out the overall portfolio returns of an investor when they have invested W, X, Y, and Z amounts of money in assets A, B, C, and D for a certain period of time.
Overall Portfolio Returns = E+F+G+H
How to Calculate Portfolio Returns on Gold Investments?
You can easily calculate your gold portfolio returns with the help of the ways mentioned above. If you are looking for a quicker way, then you can use one of the many online portfolio returns calculators. By using online calculators, you can calculate your returns in three simple steps.
- Choose your preferred online gold portfolio return calculator.
- Fill in your details like area, number of gold karats, duration of the holdings, and amount of gold that you have.
- Click on get returns or a similar option to get a report on your portfolio returns on gold investments.
Limitations of Calculating Portfolio Returns
While you can calculate the returns on your portfolio by applying the formulas and steps stated above, it is impossible for these calculations to give you definite results. The investment market is always volatile and there are several uncontrollable factors that account for a range of market risks. This puts some limitations on the way to calculate portfolio returns.
- There can be some amount of inaccuracy in the final expected returns as the formulas assume market volatility to be nil.
- Since expected returns need not necessarily be the actual returns, you can not take your investments on the basis of the expected portfolio returns only.
- The portfolio returns are calculated based upon the previous trends in the market conditions. However, there is no consideration of current geopolitical scenarios, the socio-economic status of the assets, regulatory concerns and so on.
It is always advisable for investors to not let the expected portfolio returns govern their decisions as they are not accurate. So, investors must always do their due research while choosing the most suitable investment options. You can choose the investment options that hedge your portfolio against market storms and grow in value over time. One such investment option is digital gold where you can invest in gold starting from Rs. 1. You can also sign up for an Auto-invest Plan to accumulate large amounts of gold by investing in small quantities over a long time.