How are your investments doing? Most investors have a vague notion that the market is up or down, and some might be able to throw out some numbers, like “The S&P 500 has had an average return of 11.3% over the past 10 years, or Berkshire Hathaway has returned 11.8% over the last 10 years.” But what does that actually mean?
Did your ETF investment that tracks the S&P 500 gain 11.3% annualized over the past 10 years? Let me give you a hint . . . almost certainly not. Well, why not? What were your actual returns? How do you calculate them? What factors affect your returns when compared to market returns?
In this article, I will answer these questions and more, discussing different ways to calculate and think about investment returns, why it isn’t as easy as just comparing your returns to a published number, and the factors that make the difference.
Types of Investment Returns
Total Return
The total return is the amount an investment purchased at a single point in time would have earned cumulatively over the holding period. By convention, this is typically a nominal number that includes reinvested dividends and excludes taxes.
Example: The S&P 500 has achieved a total return of 129.7% over the last five years, 265.7% over the past ten, and 830.4% over the prior twenty years. $1 invested in the S&P five years ago would be worth $2.297 ($1 invested + $1.297 in gains). $1 invested twenty years ago would be worth $9.304.
Average Annual Return
An average annual return is the simple average of an investment’s yearly returns over a set time period. You calculate it by adding up the returns for each year and dividing by the number of years.
Example: Stock A returns 10% in 2022, -5% in 2023, 7% in 2024, and 12% in 2025. The average annual return is 10-5+7+12 = 24/4 years = 6% per year.
This information is of limited utility because it does not account for the compounding effect of returns or the impact of volatility.
Compound Annual Growth Rate (CAGR)
The CAGR is an annualized average rate of return that assumes profits are reinvested each year. This is the number typically published when discussing stock returns, as it accounts for compounding, which is the fundamental principle of stock investing.
By convention, this number is usually nominal (not adjusted for inflation), includes reinvested dividends, and ignores taxes.
Example: The S&P 500 has returned an average of 13.6% over the past five years, 11.3% over the past ten, and only 8.4% over the past twenty (which includes the Great Financial Crisis (GFC)).
Comparing Average Annual Return to CAGR
A stock’s average return and CAGR are not equivalent. Let’s look at an obvious example.
Example: Stock B grows 50% in year one, 33.33% in year two, and loses 50% in year three. ($100 🡪 $150 (year one) 🡪 $200 (year two) 🡪 $100 (year three).
Clearly, the investment hasn’t grown in three years, as the starting balance of $100 is the same as the ending balance. However, the average return is 11.11% ((50+33.33-50)/3), while the CAGR is 0%. The CAGR provides a more accurate representation of the investment’s actual performance.
How to Calculate CAGR
CAGR is easy to calculate as long as the following conditions are met: the investment was made all at once, there are no dividends, and taxes are ignored. To find the compound annual growth rate of an investment, you can use the RRI function in EXCEL:
Or you can use a financial calculator, which I find easier and more convenient. I carry one in my backpack at all times (yes, I’m a financial nerd). You can account for recurring payments using the calculator, but we’ll ignore this for now.
EXAMPLE: Let’s use Berkshire Hathaway’s class B shares (BRK-B) as an example. The company famously does not pay dividends, believing it has a better use for the money, encouraging long-term thinking among its investors. I purchased a few shares of BRK-B in three tranches in late 2008 through my E-Trade brokerage account.
These three tranches show purchases of an identical number of shares and were close enough in time that we can lump them together as 150 shares purchased for $73.50 each, totaling $11,025, on October 20, 2008. Since no additional shares were purchased in this account and there was no other activity (such as sales or dividends), we can easily use the financial calculator to compute the CAGR.
N = Number of Periods. In this case, I’ve owned these shares for 17 years.
I/Y = Interest per Period. This is the variable we are solving for.
PV = Present Value. This is the total purchase price of BRK-B, or $11,025.
PMT = Any Recurring Payments per Period. In this case, $0.
FV = Future Value. This is the value at the end of the period. In this case, the current value as of 10/21/2025 is written as a negative, or -$74,197.50.
Enter the number 17, press the N button, then press Enter. Repeat this process for all the other values, except for I/Y, which is the variable for which we are solving. Once all the information is entered (don’t forget to make the FV negative), press CPT and then I/Y.
I/Y = 11.87%, meaning my BRK-B investment has a CAGR of 11.87% over the last 17 years. Below is a graph of BRK-B.
The Problem With CAGR
Now that you know how to calculate CAGR manually, you can cheat and just look it up. Really, I’m giving you permission. The CAGR and total returns for a stock are easy to look up on a site like www.totalrealreturns.com. Here are the results and corresponding charts for VOO (Vanguard’s ETF that tracks the S&P 500) for the ten years from January 1, 2010, to January 1, 2020.
Well, that was easy. Unfortunately, the problem with CAGR is that no matter what you invest in, these returns will not match YOUR returns. Unless you happened to invest all your money on January 1, 2010, in VOO and took it out on January 1, 2020, these will not be your returns. You would also have had to reinvest all the dividends and not worry about taxes.
Even my BRK-B example above wasn’t entirely accurate because I purchased shares at three slightly different times. However, this was the closest example I could find in my portfolio because this isn’t how people invest in real life! So, looking up the CAGR for a stock or Index like this is relatively meaningless when it comes to your portfolio.
To really understand your investment returns, you must be able to accurately calculate them and compare them to an appropriate benchmark.
Comparing Returns Between Two Investments
Identical Investments
If you happen to invest $1,000 each in Stock A and Stock B on the exact same date in the exact same account type, never add another dollar to either investment, and neither of the companies pays a dividend, you can simply look at the balances and confidently know which investment has performed better. Whichever has the highest balance wins. Easy.
Similar Investments
Even if the invested amounts and the date of the initial investments aren’t the same, we can still easily calculate the returns if there are no reinvestments, no dividends, and no taxes.
I can easily compare my returns for BRK-B to another stock that doesn’t pay dividends, such as Tesla (TSLA), even if I purchased a different dollar amount on a different day. Let’s say we bought $5,000 worth of TSLA on October 24, 2014, when the price was $15.68/share, and we want to find out the returns as of October 20, 2025.
N = Number of Periods. 11 years.
I/Y = Interest per Period. This is the variable for which we are solving.
PV = Our initial investment, $5,000.
PMT = Any Recurring Payments per Period. In this case, $0.
FV = Future Value. The current value is written as a negative, or -$142,675.38.
Plug these into your calculator and you will get a CAGR of 35.61%! Clearly, Tesla has been a better investment than Berkshire Hathaway during their respective timelines. However, the periods examined are not the same. We can’t calculate an investment in Tesla since 2008 because the company wasn’t taken public until June 2010! However, we could calculate or look up the CAGR of BRK-B over the last 11 years (12.94%) for a more direct comparison.
Dissimilar Investments
Unfortunately, real-world investing is rarely as simple as the above examples. In reality, most of us use dollar-cost averaging (DCA) to increase our share count over time, and many stocks, including over 75% of the S&P 500, pay dividends that are usually reinvested.
There are three major variables you must consider if you want to accurately compare the returns between two investments that are dissimilar: timing, cash flow, and taxes.
Timing: How much did you invest, and when? Did you invest $1,000 at one time, or did you dollar-cost-average (DCA) $1,000 into the position over 2 years? That makes a difference.
Cashflow: Does the investment have cashflow, such as a rental property, the coupon payment of a bond, or a stock with a dividend? You can’t directly compare a stock that doesn’t pay dividends with one that does.
Taxes: What is/was your tax rate? Is your investment in a tax-advantaged account or not? If not, are you paying the taxes on reinvested dividends as you go?
The answers to the questions of timing, cash flow, and taxes will enable you to set up a scenario that allows you to compare your investment in two non-identical investments appropriately. Note that you cannot extrapolate your investment returns to anyone else’s unless they have the exact same answers to these three variables.
Calculating Investment Returns with Dividends & Repeat Investments
In order to calculate these complex returns, we use the Internal Rate of Return (IRR), which serves as a proxy for the annualized rate of return an investment generates. IRR is more powerful than CAGR because it can account for multiple cash inputs and outputs over time, allowing us to deal with more realistic examples. Unfortunately, calculating the IRR is quite complicated. Here is the formula taken from Investopedia:
I actually used this formula while getting my MBA, and seeing it again brings back wonderful memories of being so immersed in numbers that I could barely speak English.
Fortunately, EXCEL offers us a shortcut using the IRR function for investments with regular cash flows and XIRR for those with irregular cash flows. Since the reason we are using IRR in the first place is to account for multiple stock purchases and dividends, we’ll go with the XIRR function.
Let’s start with a simple example. It makes it easier to think of each addition to the spreadsheet from your (the investor’s) point of view. The following example shows four purchases totaling a cash input into the investment (from the investor’s pocket, so entered as a negative) of $100. There were no dividends. The current value of the investment as of today, 10/21/2025, is $122. If the investor were to sell, the money would be considered a cash outlay from the investment (into the investor’s pocket, so it is a positive). What is the IRR of this investment? Let’s set up our EXCEL spreadsheet as follows.
Place all cash inflows (negative) and outflows (positive) into the value column. Place the corresponding dates of all transactions in the date column. The “Total” row is used for the current value of the investment as of today (10/21/2025). Next, use the =XIRR function.
Execute the function to find the answer (IRR). You will need to format the cell containing the answer to “percentage” to make it look like the following example.
A Real-World Example
Multiple Trades & Dividends
I began investing in International Business Machines (IBM) in November of 2021 after reading an article online about the company, its dividend, and its future prospects. I would not advise picking stocks this way, but I took a flyer, bought 100 shares, and set up DRIP (dividend reinvestment program) to automatically reinvest dividend payments. The stock price didn’t rise much the first year, and I purchased an additional 50 shares on September 15, 2022. In January 2025, after a significant run-up in the stock’s price, I sold 50 shares for $12,749.38. The stock has continued to rise since then, demonstrating that to time the market, you have to be right twice.
I looked up all my transactions on my E-Trade account, finding the current log of purchases and dividend reinvestment under the portfolio view.
However, I knew that I had sold shares earlier this year, which is not reflected in this portfolio view. I looked under transactions and trades and then found the sale from January. I then had to go back to my individual monthly statements from 2021 to find that I actually purchased 100 shares, not the 50 shown in the portfolio view. This demonstrates how difficult it can be to calculate an accurate IRR for an investment that you have bought, sold, and that pays dividends. As always, the quality of the data you enter matters.
Taxes on Dividends
If my IBM investment were in a tax-advantaged account, such as a SEP-IRA, 401 (k), or Roth IRA, the taxes wouldn’t matter. However, since my investment is in a taxable brokerage account, and dividends are taxed as ordinary income, I have been effectively paying out-of-pocket for the taxes each time that I reinvest IBM’s dividends. So, they must be accounted for. Here is a guide from Google on how to calculate the after-tax IRR for a stock with reinvested dividends.
As I filled out the spreadsheet below, I entered my investments into IBM as (-) since they were cash from my pocket, and the dividend payments I received as (+) since they were cash deposited into the account. Next, I had to enter the tax payment on each reinvested dividend as a (-) since it was cash leaving my pocket to go to the government.
Since I have been in the top tax bracket during the duration of this investment, I used the appropriate percentage each year for the calculations. I also had to account for the 3.8% net investment income tax (NIIT) that has been in effect since 2013. High-income earners must pay this on investment income, including qualified dividends.
Finally, I entered the reinvested dividends as a (-) since it was cash leaving my account into the investment. I used the current value of my IBM holdings as of the day I ran the XIRR calculation as a (+) since it would be cash entering the account from the investment. Here is the completed spreadsheet:
As you can see, this is a fairly extensive spreadsheet for a 4-year investment, involving two purchases and one sale. Fortunately, there is a shortcut. Since you are effectively zeroing out the dividend payment by entering it as a (+) and then again as a (-), it is easier just to skip that step altogether. So, I created a new spreadsheet that just included my purchases of IBM shares and the dividend payments received from the original E-Trade data. Then I made a third column (the middle column) that accounted for the taxes that I paid on the dividends that year (by taking the dividend amount x (0.37 tax rate + 0.038 NIIT), for example). The following is the new, simplified spreadsheet:
As you can see, you get the same IRR in either case; however, the second spreadsheet is much simpler. An IRR of 32.71% is exceptionally high; however, IBM’s stock has nearly tripled since my first purchase four years ago, and my second purchase in 2022 was also at a low price relative to today’s value. I only wish I had bought more!
Trust me when I say that I’m not a great individual stock investor. This investment in IBM was a fluke, and overall, my portfolio would have performed much better over the years by simply buying broad-based index funds than by investing in individual stocks. Check out “Accurately Comparing Returns of My Dividend Stocks to VTI.”
Conclusion
Thank you for sticking with me through this lengthy exercise. After a few weeks of writing some touchy-feely articles, it felt good to get back to a spreadsheet! I hope you can take away three things from this article. First, it is essential to understand the various terms used to describe investment returns and when to apply them. Next, you should be able to calculate CAGR using a financial calculator or EXCEL. Finally, you should know when to use an IRR to depict your returns accurately.
The next time you hear that an investment has returned 8.5% annually over the past 5 years, you’ll know exactly what they mean. You’ll also know that your returns from that same investment will vary, depending on the timing, dividends, and taxes specific to your situation. And you’ll know how to accurately calculate them yourself. Happy spreadsheeting.