The simple rate of return (SRR) is one of the most basic metrics used in wealth management. It compares the initial investment to the final value, providing a basic indication of profitability. Despite not taking other factors into account, it can still be a viable metric. When? Find it out in this article!
What is the simple rate of return (SRR)?
The simple rate of return (SRR), also known as the nominal rate of return, is one of the easiest and most straightforward ways to measure an investment's performance. It simply compares the initial investment to the final value, providing a basic indication of profitability.
Unlike the money-weighted or time-weighted returns, the simple rate of return does not consider the timing of cash flows. It is a quick and easy measure often used to gain a basic understanding of an investment's performance.
Simple Rate of Return Formula
What is the equation for the simple rate of return? It’s quite straightforward:
As you can see, establishing the SRR is quite easy, even with a basic calculator. However, you can still streamline this process using more advanced tools.
How to Calculate the Simple Rate of Return Easily?
There are multiple ways to calculate the SRR without much effort. Let’s look at all of them now.
Calculator
Unlike other metrics, you don’t need a finance calculator to calculate the simple rate of return. Instead, you may use a standard one. Here, all you need to do is:
- Divide the final value of your investment by the initial value.
- Multiply the result by 100.
And there you have your SRR percentage.
Microsoft Excel/Google Sheets
While a calculator is sufficient for the simple rate of return, sometimes you need to calculate multiple rates and optimize the process. In such cases, Google Sheets or Microsoft Excel will be the perfect tool for you.
To calculate the SRR, you will need to:
- Prepare a column with your initial investment values.
- Prepare a column with your end investment values.
- Prepare a third column for the SRR.
With all of that ready, you can start inputting the data. For the sake of this example, let’s say that:
- A is the column for your initial investment values.
- B is the column for your end investment values.
Include the following formula in the third column to calculate the SRR:
=(BX - AX) / AX * 100
This way, you can quickly create a file to compare multiple investments based on their simple rates of return (though we recommend the time-weighted rate of return for this purpose).
WealthArc Platform
If you want to streamline your operations even further and include the formulas in your statistics, reports, and strategy planning, you can opt for a more advanced solution: WealthArc wealth management platform. Our tool enables you to calculate the SRR, along with TWR and MWR, and integrate it into your documents wherever it's needed. This way, you don’t have to copy-paste all your data into spreadsheets, which will let you automate the process and release precious resources for more value-adding tasks.
When to Use the Simple Rate of Return? Pros and Cons
Simple as it is, the SRR might still prove helpful in your everyday operations as an external wealth manager or a wealth management firm. It is a quick and easy way to get a basic insight into the investments, which often proves invaluable when comparing vast amounts of data. Let’s look at its limitations and advantages now.
Pros of Simple Rate of Return:
- Very easy to calculate and understand.
- Useful for quick, high-level comparisons of different investments.
- Provides a basic measure of profitability without requiring complex tools.
Cons of Simple Rate of Return:
- Does not account for the timing of cash flows, making it less accurate for investments with irregular deposits or withdrawals.
- Less comprehensive than time-weighted or money-weighted measures, especially for long-term or complex investments.
When Does a Simple Rate of Return Work Best?
A simple rate of return is an excellent tool for predicting and planning your strategies. Companies often employ it to screen those investments that fail to meet the basic criteria, like the minimum return threshold set by a given business or individual. After all, it is a much quicker way to verify this than using more complex formulas.
However, if you wish to compare the investments that have already been made, the SRR might be insufficient. It does not provide you with enough information and does not take into account periods nor additional cash flow. Therefore, it is best for situations where you don’t need an in-depth analysis but rather a brief overview of hundreds of items.
The Takeaway
Knowing what the simple rate of return is and, most importantly, when and how to use it is key knowledge in wealth management. After all, spending hours trying to calculate more complex metrics when it isn’t necessary is an enormous blocker to productivity. Thus, do not overlook this metric—it can be invaluable for strategy planning, initial investment evaluations, or large-scale comparisons.
You might also read: How to Manage Your Alternative Investments Easier and Cheaper
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