Making sense of the rate of return

Most of us are perplexed when dealing with or making sense of numerical calculations. This lack of interest is quite understandable since not everyone is talented or skilled in the complex field of numerical calculation, permutation and combination, and mathematical computations involving several variables. Many a time, people grow weary of making efforts to understand the various ways of arriving at a solution for such problems.

Unfortunately, this disinterest in understanding numerical solutions can send us into a trap of making imprudent decisions that can lead to financial losses for us. More often than not, the realization of having made mistakes in such calculations comes too late to salvage the situation, such as when you have sold an annuity.

Are you aware of the ways in which to calculate the return rates on selling annuities to ensure that you are on the correct path? This lack of awareness allows fraudulent companies to take advantage of trustful investors who are not too well acquainted with the workings of the system. If people were aware of the facts and figures, there would not be so many opportunities for fraud.

What is the Rate of Return?

Rate of return (ROR) is also known as the returns on investment (ROI). It is the ratio of money that is lost or gained with respect to the initial investment amount. It is also known just as the return. It is an indicator of the amount of income or profit you gain from the annuity investment when it is measured as a percentage. For a specific financial calendar, it can also be measured as an annual or an annualized rate of return. This is the method you use for determining if you investment is providing you with a profit or a loss.

How do you calculate the Rate of Return?

ROR is calculated in terms of percentages since actual monetary figures may not indicate the comparison of profit and loss with respect to the first investment. For instance, if the profits are measured for an initial $1000 investment with a $50 interest, and these are compared with the gains on a $100 investment with its $20 interest, it will seem that the larger investment is earning more than the smaller one.

Yet, further calculations with percentage increments for the ROR show that the results are different. The $50 gained from the investment of $1000 is a mere 5% of the actual investment, whereas the $20 received from a $100 investment is a good 20% of the total investment. For a longer period, the smaller investment will prove to be much more profitable despite being a smaller investment n comparison to the larger $1000 sum.

For calculating the ROR for your investment for a one-year period, you merely need to compute the percentage of the return in comparison to the actual investment you made, similar to the example given earlier. This rate is the Annual rate for return.

When the period of investment is less or greater than one-year, for the purposes of your calculation, you should multiply or divide the monetary profit to return the comparable sum for a year. This rate is the Annualized rate.

For a rate of return for a period less that a year, e.g. for a one-moth rate of 2%, you get the annual rate simply by multiplying the monthly rate by 12, in this case, 24%. Conversely, if the rte is for more than a year, you just need to divide the total monetary earning with the product received from the initial investment and the period of time for accumulation, which would combine to provide the annualized rate for return.