A portfolio-based approach gives a clearer view of performance.

Domain investors love to talk about return on investment. The problem is that most of the ways people calculate it don’t actually reflect how a portfolio performs.

I hear two common approaches.

The first is to take total revenue from domains sold in a given year and divide it by what you paid for those specific domains. If you sold $100k of names this year and spent $10k acquiring those domains, it’s a 10x return.

But this ignores the elephant in the room: the rest of your portfolio. Most domains don’t sell in a given year. If you only measure the winners, you’re cherry-picking outcomes and overstating performance.

The second approach is to compare total revenue from domains sold this year to the total amount spent acquiring domains this year.

This is more of a cash flow metric, not a return on investment. It ignores all of the capital you deployed in prior years that is still tied up in your portfolio. A big sale today might be the result of a purchase you made five years ago. Cash flow is certainly a good metric; if it’s constantly negative, you might want to rethink your approach.

Neither of these gives you your rate of return. I talked to a fellow domain investor at the Internet Commerce Association meeting in January who suggested looking at it more like investors in other assets do.

Instead of focusing only on what sold or what you bought this year, look at your entire portfolio as the investment base. Take your total revenue for the year and divide it by your cumulative cost basis in domains at the start of the year. Include your initial registration or acquisition fees, renewals, tool costs, legal fees, etc. You also need to deduct commissions.

For example, if you’ve spent $100,000 building your portfolio over time and you generate $10,000 in sales after commissions this year, your annual return is 10%.

You can also look at this over time to generate an annual rate of return. This might make you rethink holding onto a domain with the hopes of making more later; selling now might give you a better annual rate of return.

This framing is much closer to how other asset classes are evaluated. A real estate investor doesn’t calculate returns only on the properties that sold this year. They also don’t think the rent they earn is based on no investment, just because the cash outlay was years ago.

If your returns on domains are below what you could make in real estate, stocks, etc., it might be time to retire from domain investing and focus on those instead.

If you want to understand how you’re really doing as a domain investor, stop measuring just the highlights.