Real-world examples of calculating returns on investment

Why examples of calculating returns on investment matter

Most investors think they know how their portfolio is doing. Then they try to actually calculate performance and realize it’s not as obvious as “I put in \(10,000 and now it’s \)12,000.”

Real examples of calculating returns on investment matter because:

• Cash flows move in and out at different times.
• Dividends, interest, and taxes complicate the picture.
• A 50% gain followed by a 50% loss is not a 0% result.
• Advertised fund returns rarely match your personal experience.

So instead of starting with definitions, let’s start with money-on-the-table situations and build the formulas around them.

Simple stock trade: the cleanest example of ROI

The most basic example of calculating return on investment is a one‑time stock purchase with no extra cash flows.

Scenario
You buy 50 shares of a stock at \(40 per share and pay a \)10 commission. One year later, you sell all 50 shares at \(52 per share and pay another \)10 commission. No dividends.

Step 1: Total amount invested

• Purchase cost: 50 × \(40 = \)2,000
• Add commission: \(2,000 + \)10 = $2,010 (this is your initial investment)

Step 2: Total proceeds from sale

• Sale value: 50 × \(52 = \)2,600
• Subtract commission: \(2,600 − \)10 = $2,590

Step 3: Profit and ROI

• Profit = \(2,590 − \)2,010 = $580
• ROI = Profit ÷ Initial investment
• ROI = \(580 ÷ \)2,010 ≈ 28.9%

This is a one‑year holding period, so your holding period return (HPR) and your annual return are the same: about 28.9%.

This is one of the best examples of how clean ROI can be when there are no dividends, no extra cash flows, and a clear start and end date.

Dividend stock: examples of calculating returns on investment with income

Most real investments aren’t that tidy. Income matters.

Scenario
You buy 100 shares of a dividend‑paying stock at \(30 per share. No commission. Over one year, the company pays four quarterly dividends of \)0.40 per share. At the end of the year, the stock trades at $32 and you still hold it.

Step 1: Initial investment
100 × \(30 = \)3,000

Step 2: Dividends received
Each quarter: 100 × \(0.40 = \)40
Four quarters: \(40 × 4 = \)160 total dividends

Step 3: Ending value of investment
100 × \(32 = \)3,200

Step 4: Total gain

• Price gain: \(3,200 − \)3,000 = $200
• Add dividends: \(200 + \)160 = $360

Step 5: Holding period return
HPR = Total gain ÷ Initial investment
HPR = \(360 ÷ \)3,000 = 12.0%

If you ignore dividends, you’d think your return is only 6.7% (\(200 ÷ \)3,000). This is why real examples of calculating returns on investment have to include income, not just price changes.

For a deeper dive into how dividends affect total return, the SEC’s investor education site has useful plain‑English explanations: https://www.investor.gov/

Multi‑year example: annualized return vs. total return

Total return over several years is nice, but the annualized number is what lets you compare investments.

Scenario
You invest \(5,000 in an index fund. You reinvest all dividends automatically. After 5 years, your account is worth \)7,800. No additional contributions.

Step 1: Total return
Total gain = \(7,800 − \)5,000 = $2,800
Total return = \(2,800 ÷ \)5,000 = 56% over 5 years

Step 2: Annualized return (compound rate)
We solve for the rate \( r \) in this formula:

\[ 7{,}800 = 5{,}000 (1 + r)^5 \]

\[ (1 + r)^5 = 7{,}800 / 5{,}000 = 1.56 \]

\[ 1 + r = 1.56^{1/5} \approx 1.0933 \]

\[ r \approx 9.33\% \]

So your annualized return is about 9.3% per year.

This is one of the most important examples of calculating returns on investment: translating a big multi‑year number (56%) into an annualized rate that you can compare with other options, inflation, or historical market returns.

For context, the long‑term historical annual return of the U.S. stock market (including dividends) has often been estimated around 9–10% before inflation, depending on the period you measure. The Federal Reserve’s data tools (https://fred.stlouisfed.org/) are a good place to explore long‑term market and inflation series.

Dollar‑cost averaging: examples include monthly contributions

Most people don’t invest a lump sum once and walk away. They contribute regularly. That makes the math trickier.

Scenario
You invest \(200 at the end of every month into an S&P 500 index fund for 3 years (36 months). Your total contributions are \)7,200. At the end of 3 years, the account is worth $8,400.

Step 1: Simple ROI (not time‑accurate)
You might be tempted to say:

• Total gain = \(8,400 − \)7,200 = $1,200
• ROI = \(1,200 ÷ \)7,200 ≈ 16.7%

But that ignores when the money went in. Your first \(200 was invested for 3 years, your last \)200 for just 1 month. To measure performance properly, you need a money‑weighted or time‑weighted return.

Step 2: Money‑weighted return (IRR concept)
Money‑weighted return treats your contributions like cash flows and solves for the internal rate of return (IRR). The equation looks like this:

[

-200(1+r)^{-35} - 200(1+r)^{-34} - \dots - 200(1+r)^{-1} + 8{,}400 = 0
]

Solving this numerically might give you something like 7–8% annualized, depending on the exact timing. Most brokerage and portfolio tools do this for you.

This is one of the best examples of calculating returns on investment where cash flow timing matters more than the raw total gain.

For a primer on IRR and time value of money, many university finance departments publish open course materials; MIT OpenCourseWare (https://ocw.mit.edu/) has freely accessible finance content that walks through these formulas.

Time‑weighted vs. money‑weighted: when your deposits distort the story

Let’s look at a scenario where your personal timing makes your return look better (or worse) than the investment itself.

Scenario
You invest in a mutual fund:

• Start of Year 1: You invest $10,000.
• End of Year 1: The fund is up 20%. Your \(10,000 grows to \)12,000.
• Start of Year 2: Impressed, you add another \(20,000, for a total of \)32,000.
• End of Year 2: The market drops. The fund falls 25%. Your \(32,000 shrinks to \)24,000.

Fund’s time‑weighted performance
Year 1 return: +20%
Year 2 return: −25%

Time‑weighted return over 2 years:

\[(1 + 0.20) \times (1 - 0.25) - 1 = 1.20 \times 0.75 - 1 = 0.90 - 1 = -10\%\]

So the fund’s time‑weighted return is −10% over 2 years.

Your money‑weighted (personal) return
You started with \(10,000 and ended with \)24,000 after adding $20,000. Your personal IRR is worse than −10% because you added more money right before the drop.

This is a powerful example of calculating returns on investment where:

• Time‑weighted return measures the fund manager’s skill.
• Money‑weighted return (IRR) measures your personal experience.

The CFA Institute and many university finance programs emphasize this distinction when discussing performance measurement standards.

Real‑estate example: rental property ROI with financing

Real examples of calculating returns on investment get more interesting once leverage enters the picture.

Scenario
You buy a rental property for $300,000 using:

• 20% down payment: $60,000
• 80% mortgage: $240,000 at 5% interest

In year 1:

• Gross rent collected: $24,000
• Operating expenses (taxes, insurance, maintenance, management): $8,000
• Mortgage interest (year 1 portion): $11,000
• Principal repayment (year 1 portion): $3,000

At the end of year 1, the property’s market value is estimated at $315,000.

Step 1: Cash flow to you
Net operating income (NOI) = \(24,000 − \)8,000 = $16,000
Subtract mortgage interest and principal paid from your pocket:

• Cash flow before debt service: $16,000
• Less mortgage payment (interest + principal): \(11,000 + \)3,000 = $14,000
• Net cash flow to you: \(16,000 − \)14,000 = $2,000

Step 2: Equity at end of year

• Property value: $315,000
• Mortgage balance: \(240,000 − \)3,000 = $237,000
• Ending equity: \(315,000 − \)237,000 = $78,000

You started with \(60,000 equity (your down payment). After 1 year, you have \)78,000 equity plus $2,000 in net cash flow.

Step 3: One‑year return on equity
Total gain = (Ending equity − Starting equity) + Net cash flow
Total gain = (\(78,000 − \)60,000) + \(2,000 = \)20,000
ROI on equity = \(20,000 ÷ \)60,000 = 33.3%

This is one of the strongest real examples of calculating returns on investment with leverage: a modest 5% property price increase translates into a 33% return on your cash because you borrowed most of the purchase price.

Inflation‑adjusted example: nominal vs. real return

A 7% return sounds fine—until you realize inflation was 6%.

Scenario
You invest in a bond fund that returns 7% over one year. During that year, inflation (as measured by the Consumer Price Index, CPI) is 6%.

Step 1: Nominal return
Your nominal (stated) return: 7%

Step 2: Real (inflation‑adjusted) return
Use the Fisher equation approximation:

\[ 1 + r_{real} = \frac{1 + r_{nominal}}{1 + \pi} \]

Where \( \pi \) is inflation.

\[ 1 + r_{real} = \frac{1.07}{1.06} \approx 1.0094 \]

\[ r_{real} \approx 0.94\% \]

So your real return is only about 0.9%.

This is a subtle but vital example of calculating returns on investment: your purchasing power barely increased, even though the nominal return sounded decent. The U.S. Bureau of Labor Statistics publishes CPI data and calculators you can use for this purpose: https://www.bls.gov/cpi/

ETF vs. savings account: comparing two investments with different risk

Sometimes the most useful examples of calculating returns on investment are comparisons between alternatives.

Scenario

• Option A: High‑yield savings account paying 4.5% APY, interest paid monthly.
• Option B: Broad U.S. stock ETF that returned 12% last year, including dividends.

You invest $10,000 in each for one year.

Savings account (Option A)
At 4.5% APY with monthly compounding, your end‑of‑year balance is about:

\[ 10{,}000 \times (1 + 0.045/12)^{12} \approx 10{,}000 \times 1.0459 \approx 10{,}459 \]

Return ≈ 4.59%.

Stock ETF (Option B)
If the ETF’s total return (price + dividends) is 12%:

\[ 10{,}000 \times 1.12 = 11{,}200 \]

Return = 12%.

On paper, the ETF looks better. But real examples of calculating returns on investment also consider volatility and risk. The savings account’s 4.59% is virtually guaranteed (up to FDIC limits in the U.S.), while the ETF’s 12% is backward‑looking and could easily be −20% next year.

The Federal Deposit Insurance Corporation explains APY and deposit insurance in detail: https://www.fdic.gov/resources/consumers/

Common mistakes when working through examples of calculating returns on investment

When you look at real examples of calculating returns on investment, certain mistakes show up again and again:

• Ignoring fees and commissions: A 10% gross return can become 7–8% after advisory fees, fund expenses, and trading costs.
• Forgetting dividends and interest: Price charts alone understate total return for income‑producing assets.
• Mixing up total and annualized returns: “I made 50% in 5 years” is not 10% per year; the compound rate will be lower unless returns are perfectly linear.
• Comparing a personal IRR to a fund’s time‑weighted return: They measure different things; one is about your cash‑flow timing, the other about the asset’s performance.
• Ignoring inflation and taxes: A nominal 7% return in a high‑inflation, high‑tax environment can translate into a tiny real, after‑tax gain.

If you treat each investment as a story with:

• a starting value,
• an ending value, and
• a set of cash flows in between,

then most examples of calculating returns on investment boil down to choosing the right formula for that story.

FAQs about examples of calculating returns on investment

What are some simple examples of calculating returns on investment for beginners?

Some of the cleanest examples of calculating returns on investment for beginners are:

• Buying a stock once and selling it once, with no dividends.
• Putting money into a savings account for exactly one year.
• Buying a zero‑coupon bond and holding it to maturity.

Each of these has a clear initial amount, a clear ending amount, and no messy cash flows in between, so the ROI formula (gain ÷ initial investment) works perfectly.

Can you give an example of annualized return vs. total return?

Yes. If you invest \(2,000 and it grows to \)3,000 in 3 years, your total return is 50%. But your annualized return is the rate \( r \) that satisfies:

\[ 3{,}000 = 2{,}000 (1 + r)^3 \]

Solving gives \( r \approx 14.5\% \) per year. That’s the example of how a big multi‑year gain translates into a smaller, but more comparable, annual figure.

How do I handle multiple deposits and withdrawals when I calculate ROI?

When you have multiple cash flows, simple ROI breaks down. The standard approach is to use money‑weighted return (IRR), which treats each deposit as a negative cash flow and each withdrawal or ending balance as a positive cash flow, then solves for the rate that makes the net present value zero. Many brokerage platforms and spreadsheet tools (like Excel’s XIRR function) are built around this type of example.

Are there real examples where a high nominal return still leaves me worse off?

Yes. If your investment returns 8% but inflation is running at 9%, your real return is negative. Your account balance is bigger in dollars, but your purchasing power has declined. This is a textbook example of why nominal return alone can be misleading.

What is a good example of comparing two investments using ROI?

A straightforward example of comparing two investments is putting \(5,000 into a 1‑year certificate of deposit at 5% APY versus \)5,000 into a bond fund that historically returned 6–7% but can fluctuate in price. After a year, the CD’s return is nearly guaranteed; the bond fund’s return might be higher or lower. Lining up the expected return, risk, and liquidity side by side is how professionals use ROI examples to make decisions.

The big takeaway: once you can walk through these real examples of calculating returns on investment—single trades, dividends, multi‑year compounding, cash‑flow‑heavy portfolios, leverage, and inflation—you have the toolkit to analyze almost anything in your portfolio with confidence.