The Sweet Spot Rate of Return

May 20, 2025

In the Don’t Get Mad . . . Get Invested! book, we learned that the rate of return is the amount of money an investment has gained (or lost - heaven forbid!) over a specific period of time. The rate of return can be calculated whether the money is in a bank savings account earning 1% interest or invested in stocks, bonds, and mutual funds with fluctuating markets.  Sometimes, the rate of return is referred to as “growth” and sometimes as “return on investment.”

Here's a simple formula to calculate a rate of return (not including any dividends paid on the investment):

• Current Value minus Original Investment Amount

• Divided by Original Investment Amount

• Multiplied by 100 = Rate of Return.

  
  

It’s not as complicated as it sounds.  Let’s walk through it.

Let’s assume you originally invested $50,000 five years ago, and today its current value is $82,000.  Here’s the formula:

• Current Value ($82,000) minus Original Investment Amount ($50,000) = $32,000

• $32,000 divided by Original Investment Amount ($50,000) = 0.64

• Multiplied by 100 = Rate of Return of 64%.

  
  

That’s a total rate of return of 64% over 5 years. 

To find out what the average annual rate of return would be, divide 64% by 5 years, and the result is a rate of return of 12.8% per year.  Keep in mind that 12.8% is the average return per year – some years were probably higher, some were probably lower.  Together, they averaged out at 12.8% per year.

Remember that we’re shooting for an average annual rate of return of 7%, what we call the “sweet spot” in Don’t Get Mad . . . Get Inve$ted!  Now you know how to calculate it to see if you’re hitting the sweet spot each year.