Quote from Ricter:
Ok, if I stand to make $80k on my $100k investment this year, is that not simply an 80% increase?
Yes, but theres more dirt under the carpet... so let me explain.
So why, when I divide 80%/365 (.00219) and then take that $100k and "grow" it by .219% per day, do I end up with $222.3k instead of $180k for the year?
100K initial investment at .219% a day will give you around 222K in 365 days not 180K. This is the power of compounding. You get more money at the end of the year if you compound daily rather than once a year because you are adding to your investment daily.
In your quote you said "I received an annual return of 80% "growing" it at .219% a year. Rather what you are really saying is its an "average daily return" of .219% a year. The key words is growing(how many times compounded) and average return. They are describing different things. The former describes actual growth of money while the latter is more for "descriptive" purposes.
If I stand to make $80k on my $100k this year, what is my actual daily return?
If compounded only once a year your daily return is zero until the end of year which will be 80%. (AKA "simple interest")
If compounded once a day you need a different setup. I got around .15%.
More importantly, what is a formula I can use to figure this out, instead of working backwards with trial and error on a spreadsheet?
Fortunely a basic formula is:
FV = PV(1+[i/q])^nq
where FV is future investment and PV is initial investment.
i is annual interest rate, q is amount of compounding, n is number of years to hold this investment.
Well instead of trial and error I give you:
i = q{([A/P]^1/nq) - 1}
where i will give you annual interest rate and i/q=daily interest. If you set q=365.
You can actually put this in excel. Ill show you how if you need. It comes in handy for me.
Let me know if this helps or I need to add/change anything. Also go to
http://mathforum.org/dr.math/faq/faq.interest.html
to read up on this more.
