How to calculate Investment Return
The calculator will calculate the annualized IRR return that is considered as a good index to measure an invesment return. The IRR return use the cash flow of the whole investment life and discount it based on the time factor such that the
net present value of the cash flow is equal to the initial investment based on this formula:
\[ Initial = \sum_{n=1}^{n=m} \frac{F_n}{(1+IRR)^n} \]
Where \( F_n \) is the investment Cash flow for year n (that is the Interest Earned - Contribution), m is the number of years of the investment.
How to invest
To manage your personal finance, investment is one of the most important tool for you to reach your goal. A healthly financial life almost always come along with a good investment.
Here are a list of good tips of investment:
- Set up a clear and realistic goal. Then start to invest for the goal as soon as possible. The investment process will need time to build wealth, by starting early will give you more time to grow your wealth. You can try to adjust the Investment Length to see
how it will impact your end balance. Or you can try to calculate how long it will take to reach your goal using the calculator.
- Seeking a better return. The difference of the investment return will make a big difference to the end balance given a long investment term. For example, put your money into a bank saving account might only give you a 2% return, but invest a
REIT fund might give you a 8% or even higher return. You can try to use the calculator to change the return for a fixed time period to see how it will impact your end wealth.
- Consider of investment risk and try to manage the risk. Investment will have a risk. Especially if you want to higher return. Normally, the higher return coming along with the higher risk. Therefore, to manage the risk is
the most important point in the investment process. If one investment has 20% return in one year, but -2% in the next year, but the other investment has a stable return of 9% every year, you should select the later one because it is considered as
lower risk than the first case. To separate the in flow of your investment by periodic contribution is a good way to manage the market timing risk.
- Diversify your investment portfolio is another way to manage risk. If you put all you asset into one bucket and if that bucket has a problem, your whole portfolio is going down. For example, if you put all your asset in to stock market, and when the market
clash, you will see you whole portfolio going down. By diversify, you can have one bucket offset the other if one is not performing well. Consider of the total wealth in the world is fixed, so when one section of investment world valued down, there will be most
likely another section going up.