A Beginner’s Guide to Calculating a Return on P2P investments — Welltrado

In order to calculate your return on P2P investments accurately, you first need a working understanding of how return on investment (ROI) should be calculated. ROI is basically a measure of what you’ve gained — or what returns to you — after making an investment. The simplest way to calculate it is to divide the net return of your investment with the cost of investment, and then multiply by 100 to get the percentage of your ROI. Thus, a €150 net return when divided by its €50 cost would result in a 300% ROI. That’s fundamentally how it works, but as you can would expect, the calculation won’t be that simple when it comes to investments in the real world.

Universal Total Return Formula

Another formula is called Total Return, which The Balance explains is specifically useful for determining the value of a stock investment because of how it includes dividends. To get the Total Return, follow this formula: Value of investment at end of year — Value of investment at start of year + Dividends / value of investment at start of year. And then multiply the sum by 100 to get the ROI percentage.

For instance, if the end-of-year value of your investment is €10,000, the start-of-year value is €8,000 with €500 in dividends, then your Total Return formula would be: €10,000 — €8,000 + €500 / €8,000, resulting in a Total Return of 0.3125, or a 31.25% ROI. While this doesn’t take into account the changes in value over time, it’s a simple and easy-to-use formula for determining the ROI of stocks and other similar banking industry investments.

Compound Annual Growth Rate For Determining Long-Term Performance

If your investments are held for more than a year, you also need to know how to calculate a time-dependent aspect of ROI, which is the Compound Annual Growth Rate (CAGR). This rate is determined by how your investment grows (or stagnates) over time, unlike Total Return, which disregards time in the equation itself. To get your investment’s CAGR, follow this formula: Value of investment at the end of the investment period / Value of investment at the start of the investment period. Take the sum and raise it to the power of one / total length of investment period — 1. This will allow you to see the overall performance of certain investments over the years, which is especially useful when it comes to technological investments for businesses.

For instance, while a CAGR of 35% would be desirable over a two to five year period, 35% would actually indicate stagnation if you’re computing for CAGR over a 10–20 year investment period. This is particularly important for when you’re looking into investing in new technologies that your business will be utilising for years to come. If you’re in the transport or logistics industry, Verizon Connect’s marketing manager Simon Austin details what you need to consider in terms of investing in the ideal vehicle tracking system. “Rather than basing your decision purely on the price of the product, it’s important that you carefully consider the features, quality, and performance of the system.” Austin explains that all of these factors, including training requirements and integration into your existing infrastructure, which can all affect whether or not a particular system will result in a competitive CAGR in the long run. The same can be said of blockchain technology investments aimed at streamlining existing business processes in just about any industry.

Now that you know how ROI and CAGR work, let’s dive into P2P investments and calculating P2P investment returns. P2P investment is not crowdfunding, which mainly relies on a first-come-first-served reward system on a future service or product in order to attract donors. Meanwhile, P2P investment is also known as equity crowdfunding, because rather than being donors rooting for a product, those who give money are investors who expect a financial return.

P2P Lending VS Traditional Investment

The main difference between P2P investments and traditional ways of investing is that banks and other financial institutions don’t have to be involved in P2P. This generally means that P2P investment can be done with significantly smaller amounts compared to traditional investments. For instance, Platforms like Crowdestate require a €100 minimum for P2P investing, and there is no need to go through banking red tape. This is why P2P investment has grown in popularity. It’s generally cheaper and easier to start being a P2P investor.

However, such conveniences can come at certain costs. While traditional investments have banks and standard accounting procedures for calculating ROI, different P2P investment platforms tend to have different ROI formulas. Long-time P2P platform Lending Club gives investors the option of seeing their own Net Annualised Return (NAR) via automated reports. This platform’s method calculates returns based on outstanding principal, which basically leads to overstated ROIs when you have idle cash sitting in your account or portfolio.

Different P2P Platforms = Different ROI Computations

Meanwhile, instead of just NAR, the platform called Prosper calculates the Adjusted Net Annualized Return (ANAR), which is similar except for how Prosper only uses seasoned notes (10 months or older). We won’t go into the details, but these are the things you need to consider when computing P2P ROI. If you simply let your investments ride without adding or subtracting anything to your account, you can perform a simpler ROI equation for any monthly time period. Use this formula: value of investment at the start of the period of time — value of the investment at end of the period of time, then divide the sum by the value of investment at start of time period. Multiply this by the number of months between values (for instance: four), and multiply that sum by 100 to get the ROI percentage.

The Simple Equation

If the end-of-time-period value of your investment is €10,000, the start-of-time-period value is €8,000, your P2P ROI percentage formula would be: €10,000 — €8,000 = €2000 / €8,000 * 4 * 100. This will result in ROI of 100% for that four-month period. As you can see, the computations are not that different from the aforementioned Total Return equation, with the main change being the extra multiplier to account for time in months. You can adjust that number depending on how many months you’re taking into account when computing for ROI.

This simple equation can be used for any portfolio in any P2P investment/lending platform. Combined with the option of getting automated ROI reports from your chosen platform, this should give you enough information on whether your investments are growing or headed for disaster.

Feature specially contributed to welltrado.com
 Contributed by: JBaker


Originally published at https://www.welltrado.com on May 7, 2019.