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Taking Stock of Your Rates of Return (ROI)

Calculating an investment rate of return (ROI) is an important step in helping you manage your investments. A rate of return or return on investment is the gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains. For example if you bot 10 shares of XLE at $75 per share, the initial cost is $750, and if you sold those same 10 shares at $85 per share, the rate of return is 13.3% ($85-$75/$75)on your investment. Calculating an investment ROI or rate of return is a simple and useful starting point in considering any investment. However, this simple calculation differs according to investment type or class.

For example, if Ivan Boesky invested $5000 in some real estate and sold it 10 years later for $25,000. The ROI on his real estate purchase is: 400% ($25K – $5K)/ $5K.
However Martha Stuart invested $5000 in a biotechnology stock and sold it 1 year later for $12,000. Stewart’s ROI on this investment is 140% ($12K-$5K) /$5K.

However, keeping it all in perspective, ROI's can be skewed in favor of a particular class of investment, and of course in the above example, the 140% in 12 months gives a better investment return because the time frame is shorter. Which brings me to the point of this article. Lets take two real world examples of three completely different types of investments:

A Gold ETF
Bot Spder Gld shares at $66.28 on May 14, 2007
Sold Spder Gld Shares at $145.63 on May 13, 2011
It's ROI is 120% ($145.63-$66.28)/66.28 over 3 years.


GE stock
Bot GE at $37.58 on May 14, 2007
Sold GE at $19.89 on May13, 2011
It's ROI is -47% ($19.89-$37.58)/$37.58 over 3 years.

Mutual Fund
Fidelity Advisor Leveraged Company Stock Fund
Bot FLSCX at $36.96 on May 14, 2007
Sold FLSCX at $35.31 on May 13, 2011
It's ROI is 4% ($36.96- $35.31)/35.31 over 3 years

Which investment would you invest in today? I am suggesting that being able to do these simple calculations can help you manage your investments efficiently. Remember that ROI is a historical measure, meaning it calculates all the past returns. An investment can do very well in the past and still falter in the future. For example, many stocks can yield ROI's of 200-500% during their growth stage and then fall down to the single digits as they mature.
If you invested late based on the historical ROI, you will be disappointed. Projected or expected ROI's on an unproven (new) investment are even more uncertain with no data to back it up. In addition, ROI does not account for the compounding effect of time. To get that rate of return you would need to calculate the Compound Annual Growth Rate, a more complex formulae that takes into consideration time and gives you a better rate of return number, because it also includes calculating interest, dividends and the capital gains. Also, rates of return on mutual funds are calculated differently due to new SEC rule making on how funds publish total returns and fund yields.

We offer complete professional financial plans that can help you build and allocate a portfolio of investments that calculates current and projected rates of returns based on your correct risk profile. Call to speak with an advisor at 1-877-788-1732 or when you call just ask for Rick.

UCS Investment Co.

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