Investment Basics - Know Your Returns - The Return That Counts = After tax, after inflation, after costs

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Gross Return

If you start with $100 and earn $50 on that money over five years, your gross return is:

($150/$100) - 1 = 50%

Annualized Return

Your annualized compound average return on that investment over time is:

{($150/$100)^(1/5)}-1 = 8.45% per annum (pa)

Real Return: After tax, after inflation, after costs
The return that really counts is your after tax, after inflation and after costs return. Assuming a 20% capital gains tax rate, 2% pa inflation rate and 1% pa management fees. Your real after tax, after inflation, after costs return is:
Tax: $50 – 20% capital gains tax = $40 net after tax amount.
After tax gross return = ($140/$100) = 40%
After tax annualized return = {($140/$100)^(1/5)}-1 = 6.96% pa
Inflation: 2% pa = (1+.02)^5 = 1.104
After tax, after inflation annualized return = {(($140/$100)/1.104)^(1/5)}-1 = 4.86% pa
Cost: 1% pa = (1+.01)^5 = 1.051  After cost amount = ($150/100)/1.051 = $142
After costs, after tax, after inflation annualized return = {(($100+($42-20%))/1.104)^(1/5)}-1 = 3.98% pa