Return on investment: how a return is worked out, shown and advertised
A return is a sum. It has a starting amount, a rate and a number of periods, and things come off it along the way: fees, inflation, the chance of a loss. This guide sets each of those sums out long-hand, using the worked examples and figures that Moneysmart, ASIC, the ABS and the Reserve Bank publish, and recalculates each one.
A guide published by Dotto. General information, not financial advice: it does not deal in investments or give financial advice, and it does not name, rank or rate any investment, fund or platform.
Moneysmart’s worked example: $2,000 for two years at 5% a year, added monthly
0.05 ÷ 12the yearly rate, split into months
=0.00416667the monthly rate
2 × 12 = 24months in two years
$2,000the starting balance
×(1.00416667)24grown once a month, 24 times
=$2,209.88the balance after two years
Moneysmart’s figures; recalculated for this guide, which reaches the same $2,209.88.
Six worked sums
Each guide takes one line of a return and works it through with a source’s own example: compounding, fees, inflation, the way past returns may be advertised, risk, and the word “guaranteed”.
Why ASIC treats the word with care, and how a promise of high, steady returns reads as a sum.
What goes into a return figure
Moneysmart’s glossary defines a return in a few words: the money an investment earns. When it explains how to check an investment’s performance, it asks for more than one number: the change in value, the payments the investment made along the way, such as interest, dividends or rent, and the fees and other costs, which also affect the return.
The parts of a return, set out as a sum
Change in valueup or down
+Income paid along the waysuch as interest, dividends or rent
−Fees and other costs
=What the investment returned
The parts are the ones Moneysmart names for checking performance; the layout is this guide’s.
Two cautions travel with that sum. A reported return may already include the income, or already have the fees taken out, and Moneysmart’s point is not to count those amounts a second time. When fund returns are compared, it suggests the same dates, investments with similar strategies and risks, and figures that include the same kinds of fees.
How this guide does its sums
Long-hand working on squared paper: the way every sum on this site is set out. Photo by Dx21 on Pixabay
No market returns. The guide quotes no current rate of return and no fund’s results. Each sum starts from a source’s own worked example or published figure and is recalculated here; where a line is this guide’s own arithmetic, it says so.
Models, not predictions. Moneysmart describes its compound interest calculator as a model whose results are only estimates and may be higher or lower, and says it shows results in future dollars, with no adjustment for inflation.
Licences are checked at the source. Moneysmart explains that anyone offering investments in Australia needs an Australian financial services (AFS) licence, or must act under someone else’s, and that a licence does not mean ASIC endorses the business or that an investment is safe. Licences can be looked up on ASIC’s Professional Registers, and Moneysmart keeps an Investor Alert List.
