How to calculate investment return

What is investment return?

Return measures how much you gained relative to what you invested, not the final balance itself. Two investors can end with the same amount in the account and have very different returns: what sets them apart is how much each one put in to get there¹.

The simplest way to measure it is the total return:

total return = (final value − total invested) ÷ total invested

For example, if you invested €10,000 in total and ended with €13,000, the total return was 3,000 ÷ 10,000 = 30%. But 30% over how many years? That is where annualised return comes in.

Total return and annualised return

The annualised return turns the total gain into an average yearly rate, with compounding already built in. It is the number that lets you compare investments with different horizons fairly: 30% over 3 years is not the same as 30% over 10.

In the example above, 30% over 5 years works out at about 5.4% a year; over 10 years, at about 2.7% a year. The same total gain looks far more modest when stretched over more time, which is why the horizon must always be part of the calculation.

You do not need to do this by hand. Our investment return calculator projects the final value, the total invested and the gain from an initial amount, a monthly contribution and the return you set.

Nominal value and real value: the part many forget

The number you see in the account in the future is the nominal value. But what really matters is the real value: how much that amount is worth in today's purchasing power, after taking out inflation. The formula is direct:

FV_real = FV_nominal ÷ (1 + inflation)^years

Imagine you project €124,379 in 20 years. With average inflation of 2% a year, that amount is worth about €83,704 in today's money. The money still grows, but inflation eats part of the gain. Looking only at the nominal value gives a greater sense of wealth than the real one.

The rule of thumb: a nominal gain of 5% a year, with 3% inflation, is only about 2% real. So when judging a long-term investment, always reason in real terms.

The role of monthly contributions

The initial amount is only the starting point. Steady monthly contributions add to the balance and start earning in their own right. Over time, through compound interest, it is often the regular contributions, not the initial amount, that build most of the result.

Take the example: €5,000 to start, €200 per month, at 7% a year over 20 years. You invest €53,000 in total and the projected balance is about €124,379. Over €71,000 is gain, and most of it comes from the monthly contributions compounding year after year. Consistency usually matters more than trying to time the "right moment" in the market.

Which return to use in projections

The future return is an estimate, never a guarantee. As a reference, the long-run historical average of a global stock index like the S&P 500 is around 7% a year in real terms (above inflation), but with very good years and negative years in between.

A few prudence rules when choosing the rate:

• Use a moderate rate, below the best historical case, so you do not build unrealistic expectations.
• Compare scenarios (for example 4%, 6% and 8%) rather than fixing a single number.
• Remember the risk: equities can fall sharply, especially over short horizons. The long-run average only materialises with time and discipline.

Gross and net return: tax

There is also tax. In Portugal, capital gains on shares and funds are generally taxed at an autonomous rate of 28%². The net return (after tax) is therefore lower than the gross one.

A simple way to approximate the effect is to project with a return slightly below the expected gross one. If you are working out the tax on a sale, you can use the capital gains calculator to estimate how much goes to the tax authority.

Putting it all together

To judge an investment well, combine the three pieces:

1. The return relative to what you invested, not the final balance on its own.
2. The horizon, through the annualised return, to compare fairly.
3. Inflation and tax, to reach the real and net gain.

Try your own numbers in the investment return calculator and see, year by year, the nominal value and the real value side by side. The goal is not to predict the future to the cent, but to grasp the order of magnitude and make decisions with realistic expectations.