When you get your plan statements, pay attention to the section that provides total return information. It’s important because it gives you the bottom line on how well an investment fund or portfolio is performing.
In investing, the word return refers to the amount you earn on the money you’ve invested. For example, if you invest $100 and earn $15 of interest, your return is $15 or 15%.
To calculate your total return, you also need to include how much the investment gains or loses in value. So, if that same investment lost 5% of its initial value, its total return would be 10%.
Average annual total return takes compounding and the length of time you hold an investment into account.
Inside Fund Returns
An investment fund’s total return has three components:
- Share Appreciation / Depreciation — the increase or decrease in the market value of the fund’s shares.
- Income — any interest or dividends earned by fund investments.
- Capital Gains — the profits earned from the sale of investments in the fund’s portfolio.
- Comparing Total Returns
Knowing an investment’s total return (or average annual total return) helps you compare that investment to other investments. You also can compare an investment’s return to a benchmark index, such as the S&P 500*, that tracks the performance of similar investments.
Investments may have periods when they do not perform as well as similar investments or a relevant index. However, that doesn’t mean that you should immediately get rid of an investment just because it’s had one down period. Take a look at other factors that may affect performance, such as the economy as a whole or a decline in one industry. The investment may soon recover. If an investment does take a long-term turn for the worse, however, it may be time for a change in your portfolio.
So, the next time you receive a statement, take a look at your total return to get to the bottom line on how well your investments are performing.
If you have any investment fund or portfolio questions, contact Security National Bank Wealth Management below.
* Standard & Poor’s 500 (S&P 500) Index tracks 500 industrial, transportation, financial, and utility company stocks.
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