Question 1

How do I calculate my investment return

Accepted Answer

Use the formula: Return = (Ending Value - Beginning Value + Dividends) / Beginning Value × 100%. For time-weighted returns, use: CAGR = [(Ending Value / Beginning Value)^(1/n)] - 1, where n = number of years.

Question 2

What is a good rate of return on investments

Accepted Answer

Historically, stock market returns average 10% annually before inflation. Bonds return 3-6%. A balanced portfolio (60% stocks/40% bonds) historically returns 7-8%. Your expected return depends on asset allocation and risk tolerance.

Question 3

How much should I invest each month

Accepted Answer

Aim to invest at least 15-20% of your income. If you start early, 15% may be sufficient. If you start late, you may need 25-30% to catch up. The key is consistency: invest every month regardless of market conditions.

Question 4

What is the difference between APR and APY

Accepted Answer

APR (Annual Percentage Rate) is the simple annual rate. APY (Annual Percentage Yield) includes compounding. For investments, APY is always higher than APR and represents your actual earnings. Example: 8% APR with monthly compounding = 8.30% APY.

Question 5

How does compound interest work

Accepted Answer

Compound interest means you earn interest on your principal AND on previously earned interest. This creates exponential growth. The longer your time horizon, the more powerful compounding becomes. Start early to maximize the effect.

Question 6

Should I pay off debt or invest

Accepted Answer

Prioritize high-interest debt (credit cards, personal loans above 7%) first. Then build emergency fund. Then invest for retirement. Low-interest debt (mortgages, student loans under 5%) can be paid while investing.

Question 7

What is dollar-cost averaging

Accepted Answer

Investing a fixed amount regularly regardless of market conditions. For example, $500/month automatically invested. This smooths out purchase prices, removes emotional decision-making, and reduces timing risk.

Question 8

How much do I need to retire

Accepted Answer

A common rule is 25x your annual expenses. If you spend $60,000/year, you need $1.5 million. This assumes a 4% safe withdrawal rate. Your personal number may vary based on lifestyle, healthcare costs, retirement age, and location.

Question 9

What is asset allocation

Accepted Answer

Dividing your portfolio across different asset classes (stocks, bonds, cash, real estate) based on your risk tolerance, time horizon, and goals. Younger investors typically hold more stocks for growth; older investors hold more bonds for stability.

Question 10

How do fees affect my investment returns

Accepted Answer

Even small fees dramatically reduce long-term returns. A 1% fee over 30 years can reduce your final portfolio by 25-30%. Choose low-cost index funds (0.05-0.20% expense ratios) instead of actively managed funds (1%+ expense ratios).

Question 11

What is tax-loss harvesting

Accepted Answer

Selling investments at a loss to offset capital gains for tax purposes. You can offset unlimited capital gains and up to $3,000 of ordinary income annually. Excess losses carry forward to future years. Must follow wash-sale rules (don't buy same stock within 30 days).

Question 12

Should I invest in individual stocks or index funds

Accepted Answer

Most investors should use low-cost index funds for core holdings (90-95% of portfolio). Index funds offer broad diversification, low fees, and market-matching returns. Individual stocks (5-10% max) are for experienced investors comfortable with higher risk.

Question 13

How often should I rebalance my portfolio

Accepted Answer

Rebalance when asset allocation drifts 5-10% from targets. This typically happens annually. Rebalancing maintains your risk level and forces you to sell high (overweight assets) and buy low (underweight assets).

Question 14

What is the difference between Traditional and Roth IRA

Accepted Answer

Traditional IRA: Tax-deductible contributions now, pay taxes in retirement. Best if you expect lower taxes in retirement. Roth IRA: After-tax contributions now, tax-free withdrawals in retirement. Best if you expect higher taxes in retirement or are young.

Question 15

How does inflation affect my investments

Accepted Answer

Inflation reduces purchasing power. If inflation is 3% and your investments return 8%, your real return is 5%. To beat inflation long-term, invest in assets that historically outpace inflation: stocks (7-10% nominal), real estate, and inflation-protected securities.

Practice Examples

Question 16

Example 1: Calculate Investment Growth

Accepted Answer

Scenario:

Starting Investment: $25,000
Monthly Contribution: $750
Annual Return: 9%
Years: 25

Calculation:

r = 0.09 / 12 = 0.0075
n = 25 × 12 = 300

FV = 25,000 × (1.0075)^300 + 750 × [((1.0075)^300 - 1) / 0.0075]
FV = 25,000 × 9.408 + 750 × [(9.408 - 1) / 0.0075]
FV = 235,200 + 750 × 1,121
FV = 235,200 + 840,750
FV = $1,075,950

Total Contributions: $25,000 + ($750 × 300) = $250,000
Total Earnings: $825,950

Question 17

Example 2: Calculate Required Contribution

Accepted Answer

Goal: $1,000,000 in 20 years Starting: $10,000 Return: 7%

Monthly needed:

FV = P(1+r)^n + PMT × [((1+r)^n - 1) / r]
1,000,000 = 10,000 × (1.00583)^240 + PMT × [((1.00583)^240 - 1) / 0.00583]
1,000,000 = 10,000 × 4.034 + PMT × 509
1,000,000 = 40,340 + PMT × 509
PMT = $1,887/month

Total Contributions: $462,880
Investment Earnings: $537,120

Question 18

Example 3: Fee Impact Comparison

Accepted Answer

$100,000 starting, 30 years, 8% gross return

Low-Fee Fund (0.05%):

Net Return: 7.95%
FV = 100,000 × (1.0795)^30
FV = $932,257

High-Fee Fund (1.5%):

Net Return: 6.5%
FV = 100,000 × (1.065)^30
FV = $661,436

Difference: $270,821

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Disclaimer: Investment calculator provides estimates based on inputs. Past performance does not guarantee future results. Investments involve risk including possible loss of principal. Consult financial advisors for personalized investment advice.

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