How to calculate the real return on an investment without forgetting costs

Short answer: start from the final value, deduct fees and taxes, compare with the initial value to get the net return and then deduct the period's inflation to reach the real return. This shows how much your purchasing power actually increased. This text is educational and is not investment advice.

What helps before you start

• The amount invested and the final value (or the projection).
• The fees charged: management, brokerage, custody or others.
• Information about taxes applicable to the type of investment and the term.
• The period's inflation, measured by an official price index.

Steps

1. Write down the initial value and the gross final value. The gross return is the difference between the two, divided by the initial value.
2. Subtract the fees. Some are charged as an annual percentage, others as a fixed amount. Add them all up over the period.
3. Calculate the taxes. They depend on the type of investment, the term and current legislation. Check the current rules or consult a professional.
4. Get the net return. Final value minus fees and taxes, compared with the initial value.
5. Deduct inflation. Compare the net return with the price change over the period. A rough way is to subtract inflation from the return; the more precise way is to divide (1 plus return) by (1 plus inflation) and subtract 1.
6. Consider the term. Returns over different periods are not directly comparable; convert to an annual basis.

An example

Imagine you invested 10,000 and, after a year, the gross value is 11,200, or a 12% gross return. Fees totaled 100 and taxes 150, leaving 10,950, or a 9.5% net return. If inflation in the period was 5%, the real return is approximately (1.095 divided by 1.05) minus 1, or about 4.3%. The numbers are illustrative and do not reflect real products.

Common mistakes

• Comparing the advertised yield without deducting fees and taxes.
• Ignoring inflation: it erodes purchasing power.
• Comparing different terms as if they were equal.
• Considering only the best scenario: past returns do not guarantee future returns.
• Forgetting risk: a higher return usually comes with more uncertainty.

Next step

Choose an investment you hold or are evaluating and redo the calculation with the real costs.

Related tool

Use the investment return calculator to simulate the calculation with your values. It is an educational tool, not a recommendation.