How is average annual return calculated in Quicken? What's the difference between average annual return and return on investment, and why does a time period sometimes show N/A? This topic explains the formulas behind Quicken's investment performance metrics, with definitions and examples.
Average annual return (IRR)
Average annual return is often called the internal rate of return (IRR). It is the annual interest rate that a hypothetical savings account would need to earn to produce the same result as your investment. The calculation accounts for every purchase, sale, dividend, and change in share price.
Average annual return weights each cash flow by the date it occurred. Money you invested in January and money you invested in October aren't treated the same, because the earlier investment had more time to grow. Simpler return figures ignore this timing.
Formula
Quicken solves for r, the annual rate of return, in this equation:
Σ cf_i × e^(r × (t_j − t_i) / 365) = 0
Where:
-
cf_i is the dollar amount of the ith cash flow, such as a purchase, sale, dividend, or distribution.
-
t_i is the date of the ith transaction, in days.
-
t_j is the end date of the period, in days.
-
r is the annual rate of return, the value Quicken solves for.
-
e is Euler's number (approximately 2.718), which allows for continuous compounding.
Quicken finds r through an iterative method. It tests a candidate rate, refines the estimate, and repeats the process up to 100 times, stopping when the result falls within a small margin of error or stops changing.
Example
If a fund's average annual return over one year is 20% and you invest $100, you have $120 at the end of the year. Over three years at the same rate, your total gain exceeds 60%, because each year's return compounds on the previous year's balance:
|
Year |
Beginning balance |
Ending balance |
|---|---|---|
|
1 |
$100.00 |
$120.00 |
|
2 |
$120.00 |
$144.00 |
|
3 |
$144.00 |
$172.80 |
The total gain is $72.80, or 72.8%, over three years, while the annual rate stays at 20%.
Cost basis
Cost basis is the total amount you've paid for the shares of a security you currently hold. It includes commissions, fees, and reinvested dividends or capital gains distributions. It excludes the cost of shares you've sold, and it decreases after a return-of-capital transaction.
Return on investment (ROI)
Return on investment (ROI) answers a simpler question: how much have you gotten back compared to what you've put in? Unlike average annual return, ROI doesn't account for when money went in or came out.
Formula
ROI = (total inflows − total outflows) ÷ total outflows
Where:
-
Total outflows is the starting value of the position plus all purchases.
-
Total inflows is the ending market value, plus dividends and distributions, plus proceeds from shares you've sold.
Example
Suppose you buy 100 shares at $10 each, for $1,000. You later receive $50 in cash dividends and sell 20 shares at $15 each, for $300. Your remaining 80 shares are now worth $14 each, or $1,120.
Your total outflows are $1,000. Your total inflows are $1,120 plus $50 plus $300, or $1,470. Your ROI is $470 divided by $1,000, or 47%.
Note: If a position has a negative cost basis, which can happen with short positions or certain return-of-capital transactions, Quicken shows N/A for ROI instead of a misleading result.
Time period windows
Quicken calculates average annual return and ROI across several time windows. Each window appears as its own column in the Performance view:
-
YTD: From January 1 of the current year through today.
-
1-Year: The trailing 12 months.
-
3-Year: The trailing 3 years.
-
5-Year: The trailing 5 years.
Note: A column shows N/A when a holding doesn't have enough history to fill that window. For example, if you bought a stock 18 months ago, the 3-Year column shows N/A instead of an incomplete estimate. The 3-Year column requires a transaction older than 1 year, and the 5-Year column requires a transaction older than 3 years.
Average annual return compared to ROI
Both metrics are useful, but they answer different questions:
-
Timing of cash flows: Average annual return weights each cash flow by its date. ROI treats every cash flow the same, regardless of when it occurred.
-
Annual rate: Average annual return is expressed as a yearly rate. ROI reflects the total gain or loss over the whole period.
-
Best use: Use average annual return to compare an investment to another investment or to a benchmark rate. Use ROI for a quick view of total profit or loss.
If you invest money at different times, expect average annual return and ROI to differ. The gap widens as you add to a position or receive dividends. This difference is normal and doesn't indicate an error.
Where these metrics appear
Average annual return and ROI appear in the Performance view of the Portfolio tab. By default, this view shows the Avg. Annual Return IRR (%) YTD, 1-Year, 3-Year, and 5-Year columns. The ROI columns are available, but you need to add them.
To add ROI columns:
-
Select an investment account, or Investing, in the sidebar.
-
Select the Portfolio tab, then switch to the Performance view.
-
Click Customize Columns.
-
Drag ROI (%), ROI (%) YTD, ROI (%) 1-Year, ROI (%) 3-Year, or ROI (%) 5-Year from Available to Displayed.
-
Click Save.