When you’re reviewing your investments, it’s important to remember that income and returns come from two main sources, Capital Gains and Interim Income.
Capital gain (or loss)
This is the difference in the overall value of your investment between when you purchased it and now (or the date that you sold it.) You can work it out as:
((Current or sale price per unit – purchase price) * number of units) – fees and taxes
For example, let’s assume that you purchased 100 shares of Amazing Blue Widget Co. for $50 each and then sold them for $80 each. You had to pay $10 to buy, $10 to sell and 15% tax on the profit, this would work out to: (($80 – $50)*100) – $20 – $450 = $2,430 or a return of 48.6% on your original $5,000 investment.
Interim income (dividends, interest etc.)
This is the amount that you’ve received in interim payments over the life of your investment. It’s calculated as:
(Interim % * value of investment) – taxes
You would need to work this out for each interim payment that you receive.
For example, let’s assume that you’ve held 100 ABWC shares for three years, and that they paid dividends of 3% a year; in the first year the shares were $50 each, in the second, $60 each and in the third $80 each. Your return would be: 3% of $5,000, $6,000 and $8,000 less tax; this works out to: $485.
Your total return
This is equal to your capital gain (or loss) plus your interim income. You can then compare this to your original purchase price to understand what percentage gain or loss that you’ve made.
For example, your purchase price of ABWC shares was $5,000; over three years, you’ve made $2,430 in capital gains and $485 in interim returns (dividends) for a total of $2,915. That’s an increase of 58.3% over three years, or 19.4% a year – Not bad!
You should compare your total return to your targets and life goals. This can help you decide if you should keep your investments, or if it would be wise to sell them.