𝗪𝗵𝗮𝘁 𝗶𝘀 𝗮 "𝗥𝗮𝘁𝗲 𝗼𝗳 𝗥𝗲𝘁𝘂𝗿𝗻"?

Your “Rate of Return” (ROR) is the percentage amount your investments have gained, or lost, over a period of time. “Rate of Return” is the fuel that powers compounding gains.

For consistency, investors like to compare performance for each year. And yes, your ROR might be negative in some years.

𝗘𝘅𝗮𝗺𝗽𝗹𝗲: 𝗛𝗼𝘄 𝘁𝗼 𝗰𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗲 𝘆𝗼𝘂𝗿 𝗔𝗰𝗰𝗼𝘂𝗻𝘁 𝗥𝗢𝗥 𝗳𝗼𝗿 𝘁𝗵𝗲 𝘆𝗲𝗮𝗿...

• Starting balance: $10,350.26

• Contributions: $2,600 ($100 per paycheck)

• Adjusted basis: $11,650.26 (start balance + half of contributions)

• Ending balance: $14,192.31

• 𝗥𝗢𝗥 = (($14,192.31 ÷ $11,650.26) – 1) = +𝟮𝟭.𝟴%

𝗛𝗼𝘄 𝗱𝗼𝗲𝘀 𝗮 𝟮𝟭.𝟴% 𝗥𝗢𝗥 𝘀𝘁𝗮𝗰𝗸 𝘂𝗽?

• S&P 500 (for the same year): +18.2%

• 10-year Treasury Bond yield: +3.9%

• Inflation (annual rate): +3.1%

[these values are theoretical examples]

𝙔𝙤𝙪𝙧 𝙍𝙊𝙍 𝙤𝙛 𝟮𝟭.𝟴% 𝙗𝙚𝙖𝙩𝙨 𝙩𝙝𝙚 𝙢𝙖𝙧𝙠𝙚𝙩, 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣, 𝙖𝙣𝙙 𝙩𝙝𝙚 "𝙧𝙞𝙨𝙠 𝙛𝙧𝙚𝙚" 𝙏𝙧𝙚𝙖𝙨𝙪𝙧𝙮 𝙧𝙖𝙩𝙚. That’s exceptional performance. But remember: the S&P 500 has averaged just above +10% annually for 75+ years. Sustaining a 20%+ ROR every year is not going to happen. But great market years do happen quite often (more on that next week.)

𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆

Recording your annual performance in a spreadsheet each Dec 31 is a smart habit which lets you visualize your progress. My target is an annual 8% ROR average over time — enough to grow steadily without turning your savings into a gamble.

A periodic review of your investment choices, and how they have performed, may lead you to tweak your choices going forward so you can reach your goals.

Remember, achieving a sufficient ROR over the long term is what powers your wealth building journey.

· A 1% ROR does not keep ahead of inflation.

· A 3% ROR is too conservative to grow wealth fast enough.

· An 8% ROR (or more) will power your compounding curve.

The simplest way to achieve an 8.0% or higher average ROR Is through investing. Learn the ropes and invest conservatively.