With a continually changing market, investors should be prepared for anything. The decisions they take are crucial. However, no matter how careful of an investor you are, you will sometimes miss golden opportunities. But don’t worry. Sometimes, even the most experienced investors have losers in their portfolio. On the other hand, I am sure you know bad stock pickers who usually end up having a few winners in their portfolios.
Nowadays, investors know how essential it is to control their emotions and to not focus only on a few star investments, or a few underperformers. Calculating the average yield on the entire portfolio is what investors should be looking at. Do you know what an average annual yield is and how you can calculate it? If you are not 100% sure in your answer, keep on reading.
What Is Average Annual Yield?
In short, the average annual yield on an investment (or a portfolio) represents the total sum of all dividends, interest, as well as other income that the investment might generate. So, to calculate it, you need to divide the total revenue that the investment makes by the number of years held.
In other words, the average annual yield is the income received from an investment divided by the length of time the investment is owned. However, to be able to calculate what the average annual yield on your investment is, you need to know your total investment. Moreover, you need to know how much the investments are worth now.
How Average Annual Yield Works
Typically, investors use the average annual yield as a tool for analyzing the return on floating-rate investments. In other words, investments in which the interest rate changes frequently. Further, experienced investors use the average annual yield to determine the actual performance of a mixture of investments.
In short, this yield is beneficial when it comes to determining the performance overtime on any multi-year investment. However, some investors prefer to use other versions such as the annual percentage yield, the tax-equivalent yield, the seven-day yield, as well as the stock dividend yield.
Calculating the Average Yield
As we have already mentioned, you need to know your total investment. Generally, the first step to finding the average yield on your investments (or portfolio), you have to calculate the total initial investment.
Now, the second part is not so easy. You have to calculate the total value or proceeds—for instance, all dividend payments from all of the investments. Of course, you have to focus only on the period of time you are interested in.
The third step is to subtract your total ending value from the initial investment. By doing so, you will find your gain or loss. Then, you have to divide the profit or loss by the total ending value to calculate the average yield as a decimal. So, now comes the last step. So, you must multiply the result by 100 to convert it to a percentage.
Example of Calculating the Average Yield
Here’s an example in a simple step by step guide.
- So, say you have invested in three different stocks – Stock A, Stock B, and Stock C.
- Moreover, you started with $100 in Stock A, $300 in Stock B, and $600 in Stock C.
- A few years later, Stock A is unchanged, Stock B has gone down by $100, and Stock C has increased with $200 in dividends.
- Meaning, Stock A is still $100, Stock B is $200, and Stock C is now $800.
- Now, to find your initial investment, you have to add $100 plus $300 plus $600. (2)
- Your initial investment is $1,000. Basically, this is step one from the formula.
- Further, to find the total value, you have to add $100 plus $200 plus $800. (4)
- Your total value is $1,100. Of course, this is step two.
- As we mentioned, the third step is to subtract your total ending value from the initial investment. So, you must deduct $1,000 from $1,100.
- Your gain is $100.
- Now, you have to divide the gain $100 by the total ending value of $1,100 to get 0.09.
- Finally, you must multiply 0.09 by 100 to convert the result into a percentage.
- The average yield on your investment is 9 percent.