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2 Quick Points to Simplify Total Return
An important metric to understand
Total return, when measuring performance, is the actual rate of return of a security or a portfolio of securities over a given period. Total returns include items such as capital gains, dividends, and distributions realized over the given period. Why should I care about total return? As a long-term investor, it is a key metric to look at regarding the performance of your portfolio. The higher the total return of your portfolio, the better it has performed over time. The following two points will help to simplify total return further:
1. How Total Return is Expressed
2. Average Annual Total Return
1. How Total Return is Expressed
Total return is expressed as a percentage of the amount invested. To showcase it, let’s run through a quick example. Joe buys 100 shares of Stock X at $100 per share, an initial value of $10,000. After two years, Stock X grows from $100 per share to $120 per share, which means the current value is now $12,000. $12,000 — $10,000 = $2,000 total gain. $2,000 / $10,000 = 0.20 or a total return of 20%.
2. Average Annual Total Return
An important form of total return to know about is average annual total return. Average annual total return is total return over a period divided by the number of periods that have taken place. Average annual total return helps to get a better understanding of total return on an annualized basis. Using the total return from the last section, if you want to get the average annual return of Stock X over the two years, you will do 20% / 2 = 10% average annual total return.
When it comes to quickly finding the historical total return and average annual total return of a security, you can use ytdreturn.com. The website allows you to search for a security, input a date range, and learn more about its total return and average annual total return, considering and not considering dividends reinvested. Historical performance is not everything, but in gaining an understanding of it, you will understand better the potential performance of the securities you hold. Continue to stay focused as you go down the road of long-term financial success. Those total returns you want require it.
